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Summer gasoline price surge unlikely, U. of I. expert says

Don Fullerton
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L. Brian Stauffer

Finance professor Don Fullerton says a weak economy will curb gasoline price surges that historically accompany the summer travel season.

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4/29/2010 | Jan Dennis, Business & Law Editor | 217-333-0568; jdennis@illinois.edu

CHAMPAIGN, Ill. — Gasoline prices could creep past $3 a gallon this summer, continuing a slow climb but still below record prices of just two years ago, a University of Illinois energy policy expert says.

Don Fullerton says a weak economy will curb price surges that historically accompany the summer travel season, which instead will likely bring only modest increases to the current national average of $2.87 for a gallon of regular gasoline.

“Barring the unforeseen, prices this summer aren’t going to be much different than they are now,” said Fullerton, a finance professor and former deputy assistant secretary of the U.S. Treasury Department.

He says any significant price increase for summer would already be showing up at the pump because gasoline pricing reflects long-term projections of supply and demand.

If steeply higher prices were forecast for summer, fuel companies would be stockpiling gasoline now, reducing supplies and driving up current prices, said Fullerton, a researcher with the U. of I. Institute of Government and Public Affairs and the Center for Business and Public Policy in the College of Business.

“Gasoline is storable, so why sell it at today’s prices if you could hold onto it for two or three months and sell it for $3.20?” he said. “If everyone thought it would hit $3.20 over the summer, then stockpiling would have already pushed prices to $3.10.”

He cautions that gasoline prices are volatile and still could move sharply higher or lower this summer based on a host of factors that range from politics in oil-producing nations to fires or storms that shutter refineries.

“There’s always an unpredictable element that could drive prices up or down,” said Fullerton, an expert on the economic impact of environmental regulations. “And that could be almost anything.”

Gasoline prices hit a record $4.11 per gallon in July 2008, but tumbled amid a global recession that withered demand. Prices have since inched up slowly, rising about a quarter a gallon since last June.

As the world’s economy rebounds, prices will likely continue a steady climb back to $4 a gallon, said Fullerton, who heads the environmental and energy economics program for the National Bureau of Economic Research, a nonprofit, nonpartisan think tank that provides economic analysis for government, business and the academic community.

“If everything turns out as expected, we’ll get this slow, gradual climb,” he said. “It’s hard to say how long that might take.”

But Fullerton says the long-range forecast could be thrown off by even more variables than the near-term predictions for summer.

Oil-producing nations could loosen or tighten supplies, he said, or war could disrupt access to Middle East crude. Economies of developing nations such as China, India and Brazil could surge or stagnate, creating swings in demand.

Breakthroughs in renewable fuels and hybrid or electrical-powered vehicles could reduce the need for gasoline, or new technology could emerge for travel or other industries that increases demand for oil, Fullerton said.

He says gasoline prices would rise if Congress approves a measure to ease global warming by limiting carbon emissions. A cap-and-trade bill approved last year by the House could boost prices by 10 or 20 cents initially and more over time, he said, but likely won’t be considered by the Senate until 2011, at the earliest.

“Long-range prices are unpredictable for a lot of reasons,” Fullerton said. “It’s important to consider all of those variables so people know how sensitive gasoline prices are and how easily they can change, either up or down.”

Editor's note: To contact Don Fullerton, call 217-244-3621; e-mail dfullert@illinois.edu

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