The summer driving season
kicks off this Memorial Day weekend and reflects not only the
adventure-seeking spirit of most Americans, but also their mood about
the economy.
The good news is that what we are seeing on the busy roads
is signaling great things about the U.S. economy. The bad news is that
U.S. refiners are struggling to keep up with the red-hot gasoline
demand.
According
to AAA, this long holiday weekend will see the second-highest travel
volume on record, trailing only the high set in 2005. (AAA first began
tracking national holiday travel volumes in 2000.) An additional 1.5
million people are expected to take to the nation’s roads, rails and
runways compared with last year.
And
it’s not just car travel that could keep the pressure on refiners.
Another 3.25 million are expected to take to the skies, increasing air
travel by 4.8 percent over last year, according to AAA.
The
refiners have been building up supplies of those famous summer blends
of gasoline to prepare. While the national average for gas prices this
week sits at $2.84 a gallon, record demand and tight supply means there
are risks that could still rocket higher.
U.S.
refiners have their work cut out for them as a strong pre-holiday
gasoline demand has left inventories 7 million barrels below year-ago
levels. This is a concern because if refiners don’t keep up with the
sizzling economy, gasoline prices will have to go up.
It
is not like the refiners are not trying, but they have had a difficult
time getting gasoline supply just back to the lower end of the average
range this year. They have had to deal with OPEC production cuts that
drove up crude prices for refiners, along with the loss of supply from
one of their favorite exporters in Venezuela.
Recent
Iran tensions have also added to the risk premium for oil. Risk premium
is real and does impact prices. Because the risk of supply is high,
insurance costs go up and that is tacked on to each barrel of oil that
refineries must buy.
When it comes to
gasoline, the cost of crude matters to you. About 56 percent of what you
pay at the pump for a gallon of gasoline is tied to the cost of crude
oil.
The U.S. energy industry has done its part
by increasing production levels to 12.2 million barrels of oil a day --
and this is perhaps the only reason that gasoline prices are not much
higher than they were a year ago. And while the risk of a price spike
for gasoline remains high, a cooling down of tensions with Iran and
recent crude supply increases have stabilized prices for now.
So even though we are seeing gas prices that are somewhat high, summer is here and the worst of the price spike might be over.
As
I have said many times before, the best way to measure the health of
the U.S. economy is sometimes in miles per gallon. So with gasoline
demand being as strong as it is, it is showing us that the economy is
humming along and consumers are ready to spend money on the open road.
Phil
Flynn is senior energy analyst at The PRICE Futures Group and a Fox
Business Network contributor. He is one of the world's leading market
analysts, providing individual investors, professional traders, and
institutions with up-to-the-minute investment and risk management
insight into global petroleum, gasoline, and energy markets. His precise
and timely forecasts have come to be in great demand by industry and
media worldwide and his impressive career goes back almost three
decades, gaining attention with his market calls and energetic
personality as writer of The Energy Report. You can contact Phil by
phone at (888) 264-5665 or by email at pflynn@pricegroup.com.
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