Will Gas Prices Grow to $5 a Gallon?
Meg Handley

Tensions with Iran and increased global demand could push prices higher

Buzz about the possibility of gas costing $5 a gallon this summer caused quite a stir recently, but could prices really spike that high come June?

Average gas prices hovered around $3.39/gallon nationally -- the highest January gas prices ever -- up 11 cents this month and almost 30 cents over last year's prices.

That's still a long way off from the $4.11/gallon peak the nation saw in July 2008, but analysts point to a variety of economic pressures that could translate into painful prices at the pump.

For starters, tensions with Iran over its threats to close off the Strait of Hormuz have pushed crude oil prices up over the past several weeks, increasing costs for refiners and retailers who are further down the production and delivery stream.

With Tehran digging its heels in, the situation recalls some of the same supply issues the world had to deal with following the uprisings in Libya, which severely curtailed the country's production capacity and limited oil supply. The Strait of Hormuz is the world's most important oil transit chokepoint, according to the U.S. Energy Information Agency, shuttling in around 17 million barrels of oil per day,which amounts to about 20 percent of oil worldwide.

Also, with the U.S. seeing some glimmers of economic recovery, demand for gasoline has ramped up. U.S. demand coupled with other emerging markets, is likely to keep prices elevated.

"We're forecasting a number approaching $4 [retail price] this summer," says Sarah Emerson, president of Energy Security Analysis Inc. "That's still a high price. That's a painful price and people might say, 'Well, I'm not going to drive as much.'"

Still, $5/gallon gas probably isn't in the cards.

European economies face a particularly hard economic year as they try to repair their balance sheets and China's growth, while still good, is showing signs of slowing. Those factors could reduce demand for oil and ease price pressures.

"If the Iran story doesn't pan out and oil continues to flow unhindered, it's really hard to create those stories of $5 oil," Emerson says.

 

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