Spiking gas prices could ding consumer recovery

A summer surge might bruise sentiment and the already sluggish real-estate market.

By TheStreet Staff Jan 18, 2012 12:30PM

By Andrea Tse

 

Gasoline prices could spike high enough this summer to significantly rattle consumer confidence and further depress an already sluggish U.S. home sales market.

 

One major driver behind gasoline prices will be Iran, which threatens to retaliate against Western embargoes of its oil imports by closing the Strait of Hormuz, which allows for the passage of as much as 20 million barrels of crude a day on tankers. There is a roughly 96% positive correlation between gasoline and crude oil prices.

 

"Even the belief that there is a realistic chance that Iran could attempt to do so could send crude prices, and very quickly thereafter gasoline prices, spiraling upward," says Neal Walters, a partner in A.T. Kearney's energy practice.

 

Diane Swonk, Mesirow Financial's chief economist, says retail gasoline prices at around $3.45 a gallon represent a tipping point where drivers curb their gasoline consumption and consumers make more trade-offs in their budgets. An event like the Iranian closure of a key waterway for transporting oil could send gasoline prices soaring above that mark and seriously tip the scales against the recovery in U.S. consumer confidence.

 

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Tim Evans, a Citi futures perspective energy analyst, says retail gasoline prices could breach the $4 spike reached in 2008 if Iran were to make any major moves of this nature.

 

Michael Feroli, JPMorgan's chief U.S. economist, said, "If gasoline were to rise to around $4 a gallon by April or May, then I believe . . . consumer spending would come in below trend, as disposable income gets squeezed."

 

The shuttering of various European and U.S. northeast refinery operations of late due to unfavorable margins and a difficult lending environment could also eventually lead to supply-constraint-driven gasoline price spikes when demand starts to pick up again toward the summer peak driving season, analysts say.

 

"We should be aware that the import situation going forward is also going to take a big hit into this year," cautions Oil Outlooks and Opinions president Carl Larry. "Europe is fading fast, and that should give (refineries) more reasons to slow refinery runs and see their demand come off. We'll not be able to get relief on normal gasoline imports during summer."

 

European refiner Petroplus recently decided to shut operations at three of five of its refineries across Europe because of credit constraints. Meanwhile, U.S. northeast closures have or will be taking place at ConocoPhillips' (COP) 185,000 barrel-per-day Trainer, Pa., refinery and Sunoco's (SUN) Marcus Hook and Philadelphia refineries in Pennsylvania, which combined had roughly 500,000 barrels a day of refining capacity.

 

Gluskin Sheff chief economist David Rosenberg worries that gasoline prices have stopped declining and now warns of "much more tepid" consumer spending. The economist attributes December's improvement of consumer confidence to an eight-month high and retail sales surge of 4.7% year over year directly to a 70-cent slide in gasoline prices since late summer, which was enough to add $100 billion of cash flow into consumer pocketbooks. A spike in prices could, of course, have an equally negative effect.

 

Larry, of Oil Outlooks and Opinions, thinks retail gasoline prices could jump to $3.80 in summer from roughly $3.25 now. Meanwhile, looking at just the Northeast, Energy Security Analysis president Sarah Emerson predicts an average summer high of roughly $3.60. A summer spike would also be negative for the already fragile housing market.

 

"If gas prices peak in the spring or summer, that could hurt consumer confidence during the prime months for homebuying," says Trulia chief economist Jed Kolko. Home sales tend to be highest around June.

 

Kolko adds that high gasoline prices would especially dissuade homebuyers from purchasing in outer suburban areas, where commutes are longer. That, in turn, could hurt government plans to rent out foreclosed homes, as many of them are in outlying areas, the economist points out.

 

Rich Ilczyszyn, the chief market strategist and the founder of iiTRADER.com, expects retail gasoline prices to average $3.90 this year.

 

Barring any major event from Iran, Trey Cowan, Rigzone's senior market research analyst, expects retail gasoline prices to average $3.50 or less during 2012, which is roughly a 2% decline from the previous year's prices, because of weaker demand. Citi Futures Perspective's Evans would see retail prices closer to $3 than $4 when excluding Iran.

 

"If . . . gas prices come down to $3 a gallon, then I think once again you could see the consumer do better in the second half, much as occurred in 2011," says Feroli of JPMorgan.

 

Predictions of easing gasoline prices are also being driven by views that there could be oil supply overhang concerns coming up in the absence of a strong and immediate message by the successor of Saudi King Abdullah, reinforcing the adherence to self-imposed production limits by members of the Organization of the Petroleum Exporting Countries. "Abdullah will be 88 years old in 2012, and the question of Saudi succession will likely need to be clarified relatively soon," Walters, of A.T. Kearney, says of the top oil-exporting nation.

 

The offsetting of refinery shutdowns in the Northeast by, for instance, the expansion of Motiva Enterprises -- a joint venture between Shell (RDS.A) and Saudi Refining -- of its Port Arthur, Texas, refinery to 600,000 barrels a day may also help prevent supply-constraint-driven gasoline prices spikes.

 

Meanwhile, Harry Tchilinguirian, BNP Paribas' head of commodity markets strategy, says lost European product output can be met by production by plants elsewhere in Europe. Other analysts say that during the summer, European imports may not make much of a difference on supply anyway, as their conventional blends do not match the Environmental Protection Agency's summer blend requirements for some of the high-demand areas of the U.S.

 

"A lot of people overreact, and they think this will be the year where there's not enough gasoline -- and you get these rallies," warns Tom Kloza, a chief oil analyst at the Oil Price Information Service.

 

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43Comments
Jan 18, 2012 1:33PM
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First of all the IDIOTs in IRAN are not stupid ! They have rattled the saber for yrs ! Never did nothing ! The one thing they do not want to do is piss off Communist China! Who eats more of their oil than any other country in the world! That will send the islamic idiots into a no cash situation and their government will surly fall ! So to the wall street speculators stop pimping the price for some obscure rant by an oil rich country that truly has a clue on closing the strait. Stabilize the price of oil until SOMETHING HAPPENS not wall street speculators using this as an excuse to pump the price! < What a joke ! Someone should stop you oil speculators from using FALSE reasons to pump the price ! That's why wall street is a JOKE. They are using no sound principals of supply and demand!
Jan 18, 2012 3:23PM
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What recovery does this article speak of?  I have seen no recovery.

Jan 18, 2012 2:12PM
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Higher gas prices could hurt the economy. Hmm... now there's some insight.

It all comes down to greed. How much money in your pocket is enough? Obviosuly, just a little bit more... according to the oil execs and primary share holders, anyway.

They are exporting thousands and thousands of barrels of oil over seas everyday at our expense. Keep that oil here, either in reserve or for immediate use, and lower gas prices and prices on all petroleum based products. But, no, they won't do that. The money they ae holding in their hands has blinded them to the bigger picture. Being super rich is only good, if you have an over-all economy that can continue to support you. Wipe out the majority of the nation's (and the world's) income, and, eventually, no one will be available to purchase your product; thereby, ending your cash flow.

Greed is good? Only to an extent. When it begins to wipe out an entire economy... well, everyone knows the answer to that.

Jan 18, 2012 4:09PM
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I don't know where these reporters get their information that "things" were better for the average consumer in the last half of 2011.  If you talk to the average person, working and living pay check to pay check, no savings, children in high school and/or college, they are NOT better off.  In fact, while the media tries to make us believe that the economy is getting better, I have news for you and them, the stock market and unemployment numbers has nothing to do with the average person who is either unemployed or living pay check to pay check and when it comes time to vote in November, they will vote out everyone presently in the white house, congress and senate and put someone new in office that hopefully will make a difference.  The family living pay check to pay check does not play the stock market and it does not affect their lives in the least,  the Obama administration would like for us to believe that everyone's lives are better.  NO Way Jose......
Jan 18, 2012 4:14PM
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How much more can we take.  Obviously when gas goes up so does everything else, food, electric etc.  I live in a rural part of PA and our bus service is something to be desired so I have to drive to work and we do not have natural gas in our area so I have to heat my home with oil so get banged on both ends...I can barely keep up with my monthly heating budget now and I am working (at least I have a job) but it keeps getting harder and harder...I don't know what else to cut out of my life--we have had no vacations, no eating out, not even a movie...do these politicians even care or have an inkling what is it is like for the "working class"...we are just like the serfs of old toiling to make the rich richer and us poorer...
Jan 18, 2012 4:05PM
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We here in the U.S. sit on supposedly the largest reserve left on the planet. From what I've read we are now producing enough to make it profitable to become an exporter. So why on God's green earth are we even having this discussion ? If the petroleum Co.s extracting our oil from our reserves are selling it out of the country after blasting us with all the propaganda about the Bakken Reserve. They aren't Americans, and they don't deserve to be treated as such. They are money grubbing profiteers. Their CEO's and CFO's should be tried for treason for intentionally weakening the economy at this crucial time.
Jan 18, 2012 2:56PM
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Republican's and several Democrats bleed crude. They collect PAC money while in office and lobby money after they leave. They're nothing more than political whores.  Like "Deep Throat" said in the Watergate investigation, "follow the money".
Jan 18, 2012 5:47PM
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The people that run the US, that's what's wrong with it.
Jan 18, 2012 5:03PM
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Gasoline is at the highest winter price in history.  I figured back in October that we wouldn't see prices below $2.90 a gallon so that when Fall comes around again in 2012 and will we have $3.00 gas instead  of the summer $4.50 gasoline.  Gasoline prices are set by Wall Street and the commodity traders.  If these traders had to take possession of every barrel of oil they bought before they sold it the price would be about $45 a barrel and gasoline would be $1.79.  The Oil companies sell their oil at the current market price and I don't know of any other company that would sell their product for less than market value.  Walmart doesn't, Target doesn't, the paint companies don't, trucking companies don't and neither would any other business trying to make a profit.

 

Our elected officials can take control of this whole situation by reinstating the rules in place prior to Gramm Rudman, forcing the SEC to enforce the rules on the books and reinstate Glass-Steagle.  It won't happen though as long as our Representitves and Senators can get away with insider trading, bribes and lobbying money.

 

Face it folks, with a corrupt Whitehouse and Congress along with rampant Crony Capitalism WE THE PEOPLE are SCREWED.

Jan 18, 2012 5:13PM
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Well they've been trying for years now to get our prices up to the prices of Europe. Now that all those hired during Christmas has to be cut down or let go, Wall Street will  make it somewhere. And we all know the consumers pocket is in the cross hairs of a buttslam daily.

My question is:

How come Reagan can put a price freeze on gas during his term during shortages, and it can't be done now because of price manipulation?

Jan 18, 2012 5:09PM
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Every day in China, they use more fuel than the day before. World use is increasing, not decreasing.

There is no glut of supply. There is just enough produced to meet demand.

And Obama just decided to block Canadian oil by killing the Keystone pipeline.

Transportation costs are a factor in final consumer pricing. That pipeline would have helped create jobs and increase US supply.

So we block drilling and supply, but then whine about the price?

That is completely ignorant.

We need leadership with business experience. A community organizer can't make a jobs.

Jan 18, 2012 3:47PM
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Bull. The consumer has gets screwed. When the is not enough oil, the price goes up because of supply and demand. When there is an abundance of oil, the price goes up so that the oil company profits remain the same. The American consumer can never win.

So don't give us a load of crap, just be honest.

Jan 18, 2012 6:36PM
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I am so sick of these gas companies and their damn advertisements on tv, spewing trash on how they are putting all sort of money into finding a better tomorrow, when we actually know they are putting billions in their pockets.  The b.s. these companies put out is discusting!!

 

No matter how you look at it we are screwed by the gas companies.  Gas prices to up, food prices go up (because of transportation and then the grocery stores add more on top of the transportation) etc.,etc.  I don't think its ever going to end.  The greed is overwhelming. 

Jan 18, 2012 4:50PM
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The only major driver behind high oil prices are the oil speculators. These greedy SOBs will never be happy until they have destroyed all economies and find out having all of the money is worthless if the world economies are destroyed! Our government lets it happen too. They have their hands in the cookie jar.

There is no real reason for prices to increase. If you pay attention to the people that says the price of gas is going up, they are the same people that a few weeks ago told us China's economy is coolig, i.e. they are not using as much gas. They told us the US used less gasoline last year which means we have quench our thirst for oil. These people don't even care what any one thinks. they can get away with and they are going to do it no matter what the cost is for everyone else. Wake up Washington do some thing about it or the people will do something in November!

Jan 18, 2012 5:56PM
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An election year gas price spike coupled with Barrack Hussein Obama shutting down the Keystone Pipeline=A NEW PRESIDENT!

Jan 18, 2012 5:42PM
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All we must do is improve our deep sea drilling.  The Gulf of Mexico has some of the largest oil fields in the world that have enough oil to supply the US for the next 150 years.  Also we haven't even tapped Alaska.  Just get Barry & his Libbys out of office, pipe down the green tree huggers, and we can tell Iran and it's neighbors to go and fly a kite.

Jan 18, 2012 4:05PM
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It's like the Stock Market, it's because of this or it's because of that, I think people that write these articles don't know the Butt for their head, people that Own the Oil don't give a crap about nothing but money, so please don't sugar coat the truth .......
Jan 18, 2012 7:25PM
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Rising gas prices played a BIG PART of the financial collapse.

 

Nov 2008 gas prices were $1.87

Jan 2012 gas prices are $3.20

 

Looks like Obama gets along real well with the oil speculators.

Jan 18, 2012 3:30PM
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Oil prices are generated by the stock markets. Stocks go UP Oil follows
stock markets go down oil go down...
when the oil reaches a certain point stocks will rise on that.
its a rich mans Casino

Jan 18, 2012 4:38PM
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Screw any recovery! why whould we take away any of exxon mobile 600 bil in profits!!!! without them and other dbag oil companys America can`t make it on its own!!! legal rackettering at its best!! Fix 2.00 a gal price freeze.
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