This year’s high costs contribute to decline

The San Diego Union-Tribune

After a year of being hammered by the highest gasoline prices in history, motorists may get some relief at the pump next year, some experts predict.

But just a little relief — as prices are expected to hover near record levels and could periodically spike past the dreaded $3-a-gallon level.

That said, the federal Energy Information Administration predicts a decline of 6 cents per gallon in average gasoline prices next year. The widely watched Lundberg Letter expects a more significant tumble of about 19 cents per gallon.

Among the factors leading to moderating prices next year is simply that prices were so high this year.

The average price nationwide in 2006 was a record $2.57 per gallon, according to the EIA. This year’s average, on an inflation adjusted basis, was about equal to the average of 1981.

In California, prices through Dec. 26 have averaged $2.81 per gallon, according to the California Energy Commission.

While regional prices have now slipped below the yearly average, they’ve been heading upward in recent weeks.

In its latest survey of gasoline prices, the Utility Consumers’ Action Network found San Diego County’s gasoline prices averaged $2.67 per gallon, up about 2 cents from a week ago and about 17 cents over the past month.

Compared with this time last year, prices were up 40 cents per gallon, UCAN said.

Industry experts said a significant component of this year’s high prices was heavy involvement by speculators in gasoline markets, with investors anticipating a repeat of 2005. That was when gasoline prices spiked to all-time highs after damage to refineries caused by Hurricane Katrina.

“Everyone thought the next week would bring another storm,” said Tom Kloza of OPIS, a petroleum industry monitor. “There was the expectation we would have another calamity, but that did not happen.”

All prognosticators caution that predicting gasoline or petroleum products is a dicey proposition.

“For the rest of this decade, U.S. markets are just one headline away from a mega-spike or a plunge,” Kloza said.

That said, experts anticipate an increase in fuel supplies during 2007, as more ethanol is blended into gasoline across the nation and increases the supply of fuel.

A second factor leading to the possibility of price declines next year is the forecast that oil supplies will grow more than demand. Lundberg predicts worldwide petroleum production will increase to 87 million barrels per day in 2007, up 2 million barrels daily from this year. But Lundberg bases the projection on the expectation that oil production will rise from OPEC nations, rather than fall as the organization has announced.

Lundberg expects petroleum demand next year to increase by 1.7 million barrels daily.

No matter what happens in world markets, Kloza said prices in California and other West Coast markets will continue to be more volatile and higher than elsewhere in the United States.

Kloza said the key factor in California prices is the clean-burning gasoline blend required here, a fuel that few refineries outside the state can produce. The special blend reduces air pollution and smog.

The few refineries outside the state able to meet the state’s fuel requirements are in Europe, Canada or the Caribbean, all of which can more cheaply ship fuel to markets on the East Coast.

Another factor in West Coast gasoline price volatility is that the region’s storage capacity hasn’t increased over the past 25 years, while gasoline demand has soared.

“It is a very shallow system,” Kloza said.

He warned of price spikes during the first three months of 2007, as more refineries are closed for maintenance than during the same period last year and predicted prices in the West will surpass $3 per gallon at times.

Consumer advocates say the shallow storage capacity and the failure to more significantly expand refinery capacity in California is the result of industry policies designed to fatten profits.

“The market is going to stay volatile, that’s for sure,” said Judy Dugan, research director for the Foundation for Taxpayer and Consumer Rights in Santa Monica. “Last year we had the highest prices in history without a single true crisis in the industry. There was never a shortage of crude and although prices were high, there was never (anything) that would justify the record prices.”

Dugan said the best hope for consumers is for Congress to investigate the industry and modernize antitrust laws.

“It’s all too easy for oil companies to know each other’s business and without speaking a word to each other do what is in their mutual benefit — keep prices as high as possible while investing as little as possible.”

The Western States Petroleum Association said oil and gasoline prices are largely a matter of supply and demand, though a spokeswoman for the industry organization said geopolitical factors also play a role.

Anita Mangels, the trade group’s spokeswoman, said the industry is “very keen” on expanding its infrastructure but could not cite specific projects.

She added that California gasoline prices could be affected by state legislation intended to reduce greenhouse gas emissions, which contribute to global warming.

Mangels said those efforts may include tax hikes on gasoline to discourage petroleum consumption.

“Consumers would do well to watch what will happen in Sacramento,” she said.