Investors fuel gasoline price increase

Drivers, open your wallets.

Gasoline prices, driven higher by a runaway bull market for crude oil, stand poised to smash records throughout the Bay Area in the next week and could reach $4 a gallon this summer.

Santa Rosa set a record Friday - regular gasoline sold in the city averaged $3.45 per gallon. San Francisco is just 3 cents shy of its record of $3.63, while San Jose is 2 cents short of topping its $3.50 record set in May. In much of the area, prices are climbing more than 2 cents every day.

Never mind that fuel usually is less pricey this time of year. Twelve months ago, San Francisco drivers were paying $3.03 on average for a gallon of regular, according to the AAA automotive service. Two years ago, the price was less than $2.50.

"I grew up with a love affair with the automobile - now it's gone," said Mallory Gaston, 37, of Oakland as he filled up his Nissan Pathfinder on Friday for $3.66 per gallon in San Francisco. "I will ride my bike if I have to."

To reach record heights so early in the year is a bad omen. Last year's astonishing run-up in prices nationwide didn't hit its peak until May, a time of year when Americans typically buy more gasoline than they do in March. If early spring can bring such high prices, summer could easily bring $4 gas.

"It may not be the whole state, but there are going to be pockets of $4," said Denton Cinquegrana, who tracks West Coast gasoline markets for the Oil Price Information Service.

Blame the bulls on the New York Mercantile Exchange, where contracts to buy oil are traded.

The most commonly watched price of crude oil sold on the exchange jumped 11 percent in the past month to close Friday at $101.72 per barrel. It set a nominal record of $102.59 on Thursday. Adjusted for inflation, oil prices have soared this high just once before - in 1981, during the Iran-Iraq war.

Many oil market analysts consider the current prices overblown. Speculative traders, they say, have ignored economic trends that should be pushing prices lower, not higher. Most importantly, the slowing economy has helped cut gasoline sales, meaning the country has ample supplies of gas and crude oil.

Oil as investment

But the bulls aren't focusing on that. Instead, they're keeping their eyes on long-term growth in demand in China and India. And they're viewing oil strictly as an investment vehicle, not as a fuel.

"Just like every other commodity, it's seen as a hedge against inflation," said Amanda Kurzendoerfer, a commodity analyst for the Summit Energy consulting firm in Louisville, Ky. "There's a sense that oil is a perpetually bullish commodity in the long term."

For every gallon of gas that Californians buy, about $2.35 now goes to cover the cost of the crude oil that refineries buy and process into fuel. A month ago, it was $2.13 per gallon, according to the California Energy Commission.

Retail gasoline prices have surged faster in California than they have elsewhere in the nation. The national average has risen about 6 percent in the past month to reach $3.16 per gallon. California's average is up 9.6 percent, hitting $3.44 on Friday.

That puzzles many analysts. California uses its own pollution-fighting blend of gasoline made only at a limited number of refineries, and the state's drivers typically pay about 25 cents more per gallon than do other Americans. But the state now has plenty of gasoline in stock.

"The increase we've seen in gas prices would generally be what you'd expect given how much oil has gone up," said Sean Comey, spokesman for AAA of Northern California. "But it seemed to happen more quickly than the typical time it usually takes."

The role of crude oil costs in the current gasoline price increase makes this run-up fundamentally different from last year's. Oddly enough, that difference offers some hope to cash-strapped commuters.

Last year's record-setting price spike was driven not by crude oil prices but by mechanical failures at gasoline refineries throughout the country. Production fell, and profit margins at healthy refineries soared. The average gasoline price nationwide jumped more than $1 per gallon, peaking at $3.23 in late May. California's average reached $3.49, an all-time record.

But so far this year, production hasn't been an issue.

Gas sales decreasing

Last week, California's refineries produced 2.3 percent more gasoline than they did during the same week of 2007, according to the California Energy Commission. The state's overall supplies of gasoline are almost a third higher than they were a year ago. The country's supplies are the highest they've been in 14 years.

If oil prices this spring hold steady just above $100 or fall slightly, gasoline prices shouldn't rise much further, at least not until demand increases in the summer. And if the country's economy worsens, that seasonal increase in gas sales may fizzle, possibly pushing down the price of both gasoline and crude oil. Gasoline sales are already falling, down about 1.1 percent in the past month, according to the federal Energy Information Administration.

"The U.S. consumes about 25 percent of the global oil market, so the fact that demand is slowing down is really significant," Kurzendoerfer said. "The spring and the summer months, those are the strong months for gasoline demand, and if that demand isn't there, (traders) would begin to take a second look at this."

Then again, if gasoline refineries suffer another round of breakdowns, gas prices could keep climbing. Likewise, another substantial increase in oil prices - for whatever reason - could hit drivers hard.

"It's starting to hurt," said Irene Perez, 24, of Richmond, filling her Chevy Cobalt on Friday. "You have to spend more money every week. It's too much."