How Gas Could Hit $6 a Gallon

GasPriceLastWeekChi
The national average gas price eclipsed $3.90 last week, leaving March auto sales awash in high-mpg choices. With two new variants hitting dealerships, the Toyota Prius saw its best sales month in nearly 12 years of U.S. sales. Half of the 10 best-sellers offer a hybrid version, and two of the non-hybrids have versions with EPA highway ratings of 40 mpg or better.

Fuel prices are ramping up faster than their usual summer gains, and there's a 20% chance that prices could spike to nearly $6 a gallon, industry research firm IHS says.

"Only 3 percent of consumer budgets go to gasoline. That’s tiny," IHS chief economist Nariman Behravesh told attendees at a conference sponsored by IHS and the National Automobile Dealers Association on the eve of the 2012 New York International Auto Show. "But here's the psychological part of it: They're seeing the prices every time they go to the pump."

What Is Causing the Boost?
In the near term, two factors are pushing gas prices higher. The first is supply disruptions and limited capacity. "There's not a lot of spare capacity worldwide for a variety of reasons," Behravesh said, noting supply disruptions in Yemen, Sudan and Syria are partly to blame for the price of oil.

Then there's what Behravesh called the "Iran risk premium," or a bump in gas prices from months-long fears of war with Iran. We won’t go too much into the weeds, but sanctions over the country's nuclear program could induce the country to disrupt the Strait of Hormuz, a vital shipping lane for oil. The situation remains tenuous, and IHS says "accidental" escalations, not a military strike, could lead Iran to shut Hormuz. Such fears have already driven oil up $20 to $30 per barrel.

Brent crude oil — which largely determines what drivers pay at the pump, according to IHS analysis director Mike Wall — traded at $125 a barrel on Tuesday.

"There are two narrow shipping channels there — it's fairly easy to mine," Behravesh said. "NATO forces, especially American forces, would clear [the strait], but you would have a period of a few weeks where oil could not come out of the Persian Gulf."

Twenty percent of the world's oil comes from that region. If this happened in January 2013, IHS projects oil prices would spike to $240 a barrel then retreat to $160 by spring and return to around $120 by summer.

What does that mean for drivers? Expect pump prices to spike to "the upper $5s," Wall said. Consumers would respond with a sudden, if short-lived, shift to hybrids and plug-in vehicles. The latter group was largely unavailable during gas-price spikes in 2008.

Would Nissan, GM and other plug-in automakers be able to fill the demand? GM has more Chevrolet Volts on hand than it knows what to do with, after all. But Wall suspects not. "I don’t think there is really enough [manufacturing] capacity to accommodate” an Iran-fueled spike in demand, he said.

Nissan might fare better. The automaker is shifting production of its Leaf electric vehicle to the U.S. — a move that could allow Nissan to meet the demand, fellow analyst Tracy Handler noted.

Either way, IHS says a spike to $200 or more per barrel could do serious damage to an auto industry just beginning to enjoy better times.

In the long term, Behravesh sees vast quantities of oil from unconventional sources: shale, tar sands and more. "So all of a sudden the prospects for energy supply, for energy prices, in the medium to long term are looking quite good," he said.

No Big Shift Yet
The Middle East may push gas prices higher, but consumers are sticking to the types of cars they own. Even as gas neared $4 a gallon, Detroit’s full-size pickups combined to improve 13.4% in March sales. Even the age-old Chevrolet Avalanche, which the EPA rates at just 17 mpg combined, flew 25.9%. And the Dodge Challenger, whose city EPA mileage is in the teens, saw its best sales month yet.

"There is still a market for that car, even with $4-a-gallon gasoline," an upbeat Reid Bigland, who oversees Chrysler's U.S. sales, told conference attendees. Indeed, a study last month by CNW Automotive Research showed that 82 percent of consumers still trade their cars for the same segment of vehicle, despite more than four-fifths of them listing fuel economy among the top three reasons they traded in their cars.

"Downsizing is now a function of practicality or driving needs rather than an attempt to boost fuel economy," CNW said in a statement. "In fact, of all the respondents, only 7% of large-car owners traded for a smaller model — barely more than in 2007."

Gas prices would have to reach $4.75 a gallon for consumers to make radical shifts, CNW predicts. An Iran crisis could bring that overnight — but short of it, today's choices and gas prices may not require a change in the type of car you own.

"People look at an 11-year-old car,” said Ford marketing chief Jim Farley, referencing the median age of today’s cars reaching a record 10.8 years. "Remember, most of those vehicles are V-6s," Farley said. "It's totally conceivable now that they can get the same class of vehicle for 10 miles per gallon better."

By Kelsey Mays | April 4, 2012 | Comments (14)

Comments 

Already paying$4.10 for gas. Not that it matters we will pay the price til these car makers build some cheaper Eco cars. I only get 16 mpg, and it would not be in my nest interest to a hybrid. It would be more costly to buy one, then to continue to pay the price at the pump.

Peter H. Coffin

On the other hand, not spending $15k-25k on a newer vehicle means having $15k-25k to buy fuel with, which (even at $6.00 per gallon) is probably 200 fill-ups of "free" fuel.

Mitchell Fuqua

Funny, everyone keeps blaming Iran, who by the way DOES NOT HAVE THE CAPABILITY of closing the STraights of Hormuz.....wake-up, it will keep going up because we keep letting it, Saudis don't want it this high, only the SPECULATORS....otherwise they don't make money. How in this worlsd something that everyone needs was allowed to be speculated on...hilarious

Alayne

My 2002 Honda Civic got 36.1 mpg (404.5 miles on 11.2 gallons) combined highway and town driving (commute is 17 miles of highway driving + 8 miles town, each way). Stopped driving the mini-van (2007 Toyota Sienna gets measly 19 combined).

Fuel here in east-central WI is currently $3.93/gal.

Bill Friedline

Fuel prices are not currently tied to supply and demand. We are exporting-yes that's right-exporting a record amount of refined gasoline out of the US to other countries. There's plenty of gas, and lower US demand, but rather than lower the price in the US, they ship it out to other countries.

Yeah, this whole gas thing, I drive a 76 Gran Torino and it's probably not even in the double digits at the moment. Gas prices don't bother me. How can this be??? Because I live in a town where everything is only a few minutes away. If an $80 tank of gas lasts me a month now, a $120 tank of gas will last me the same month. Actually probably longer considering $6 a gallon gas will increase the likelihood that I'll take my bike into the shop to get serviced so I can use it more. In fact, screw it, I'm going to go service my bike RIGHT NOW.

dave

3% of the monthly budget goes to fuel? Where are they living? We spend 12-15% of our budget on fuel. I drive a Subaru wagon, dw drives a Honda Accord. Nothing flashy.

L.M.C. @ Co.

It is the psychological affect. People don't like Spending a little more at the pump they rather pay more for a fuel efficiant car ( e.g. a Toyota Prius V at 26000 then a toyota Matrix at 19000) and then pay less at the pump.

Chuck F

I am doing my part. Rode my bike to work. Wish more could. I like in Tulsa OK. People are fairly bike friendly.

Chuck F

Live, sorry.

L.M.C. & Co.

From where I live I can bike to work quicker then driving. But here in Montreal it is to cold 1/2 the year and you can't carry as much, eg: briefcase. but I have done it:)

Isaac

Gas prices don't bother me. I drive an old Lincoln Town car that gives about 21 mpg mixed driving. But the key is that I live close to work and don't drive for work. Also, I plan so that I make less trips for grocery etc.

Sale

By letting gas be this expensive there is only one reason and one reason only: Obama wants to create jobs and world aconomy analysts agree that if United States wants to keep its lead in the world it has to come up with something big that will really leave everyone in the dust... Well Obamas approach is to let gas go sky high, then automakers will have to start making more economy cars if they want profit and he will continue to legislate mpg as they did recently ... Therefore, that will open job spots and start booming industry of exporting the electric economy cars that will not depend on the foreign oil as much... That my friends is called neccessary sarifice to benefit and gain much more out of the end result... My car is going for sale once the gas hits $6/gal... Currently I get 20-22mpg city/hwy... Plus I am getting the bike that will do 60mpg and will start saving for winter months... Thats my pan... Hw about you?

Highdesertcat

It's not a question of IF, it's a question of WHEN gasoline will hit an all-time high. When I was 16 gas cost 25-cents per gallon.

There are so many forces that directly and indirectly influence the price of oil that it is impossible to nail it down.

But one thing is for sure, the price of oil will keep going up. Count on it!

And when it does, whether that be $4, $5 or $6 per gallon of gas, people will continue to buy it. They're hooked!

Our economy is built on oil, coal and natgas. Solar, wind, wave, nuclear, none of them are going to displace oil, coal or natgas. They're not even going to make a dent in the consumption of energy.

Nothing is as cheap as oil, coal or natgas and we would do well to develop our own resources along those lines.

Solar, wind and wave won't become feasible until we run out of oil, coal and natgas. And that won't be for hundreds of years yet.

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