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How high will it go?
Nobody has that good of a crystal ball, but one government economist tells us what’s on his radar screen

By Terry Scruton
senior writer

The recent spike in fuel prices following Hurricane Katrina - combined with an already record-setting summer - has many drivers fearing just how high prices will go.

The answer, according to Jake Bournazian, an economist with the federal government’s Energy Information Administration, is not an easy one.

“Every winter diesel prices generally rise, especially during December and January, to reflect a higher level of demand and a tightening of supply conditions,” he said.

This winter, however, things are a bit different. Hurricane Katrina has tightened supplies by cutting off a good portion of oil from the Gulf of Mexico.

“Because of this disruption from Katrina, which sent both gas and diesel to record high levels, it’s going to take a while for these markets to get back to full production capability,” he said.

Bournazian said he expects refinery capacity to be down by about 5 percent at least through November. What happens after that depends on how much diesel inventories are drawn down while Gulf refineries work to get back on their feet.

“If they hold up rather well, retail diesel might take a mild rise during the winter,” he said. “But if they get eroded at a steady pace, you’re going to see retail diesel prices begin to rise right before Thanksgiving.”

The good news, Bournazian said, is that the oil industry did a good job of rebuilding stocks of low-sulfur diesel fuel throughout the summer. This could help keep prices down through the winter crunch.

“They built (stocks) well above the five-year average,” he said. “So even though there has been a stock draw, low-sulfur diesel stocks are still above last year’s inventory levels. That’s a good supply position going into (the fall).”