Watch out: Here comes $4 gasoline

Watch out: Here comes $4 gasoline Prices were supposed to peak below $3 a gallon, but refinery problems, strong demand could push them much higher.

By Steve Hargreaves, CNNMoney.com staff writer

April 26 2007: 5:59 AM EDT

NEW YORK (CNNMoney.com) -- Gasoline prices, already above $3 a gallon in some states, could charge higher this summer and hit $4 a gallon in some locations, according to one industry expert.

Pump prices were supposed to peak below $3 a gallon this May, then drop off before the summer driving season got into full swing, according to the Energy Department's price forecast.

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Well, we're not even out of April yet, and the nationwide average price for a gallon of unleaded regular has hit $2.87.

Behind high gas prices: The refinery crunch

One big factor driving prices: gasoline inventories continue to fall. After a promising one-week boost in refining activity, the latest report Wednesday actually shows refining activity falling. And demand is already soaring, before the summer driving season is in fullswing.

What this means for prices is obvious, and to most drivers it is not good news.

"More and more communities are going to see gasoline that approaches or exceeds $4 a gallon," said John Kilduff, an energy analyst at Man Financial in New York. "Where we're currently at with prices, that's a given."

While geopolitical tensions have driven up the cost of crude oil, which accounts for about half the cost of a gallon of gas, refinery problems here in the United States are largely to blame for the price jump.

Five states - California, Hawaii, Oregon, Washington and Nevada - already have average prices above $3 a gallon, according to the motorist organization AAA. In California, the average price of gas has reached $3.35 a gallon.

Kilduff said it will be in those states, and possibly New England and the northern Midwest, where prices have the best chance of hitting $4 a gallon, mostly as a result of localized refinery problems.

And he thinks prices will have no trouble breaking the old non-inflation-adjusted record of $3.057 a gallon, hit in 2005 just after Hurricane Katrina.

Up, up and ...

Retail gas prices have been climbing steadily as one refinery outage after another crimped production and U.S. drivers consumed ever more in spite of rising prices.

By early this week, retail prices had risen 32 percent since the start of the year, according to the Lundberg Survey.

And the Energy Information Administration said Wednesday that gasoline supplies, which have fallen 13 percent since early February, were "well below the lower end of the average range."

Moreover, EIA reported refinery utilization fell, with refineries running at only 87.8 percent of capacity last week.

Traders had been watching that number, and gasoline future prices fell sharply last week, when refinery activity jumped for first time in several weeks.

But Tuesday's refining news caused gasoline futures to spike more than 5 cents a gallon to $2.27, their highest price since last August, lessening the chances retail prices will fall anytime soon.

An EIA analyst, who forecast a high of $2.87 just two weeks ago, couldn't say if the agency's next forecast, due out May 8, will be revised higher, although it seems likely.

"Obviously, April is not progressing as we had hoped," said EIA economist Tancred Lidderdale. "We're continually humbled by the market."