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If Libyan unrest spreads, gas could reach $5

February 22, 2011

Gary Strauss on Feb. 21, 2011 USA Today News

If political unrest in Libya spreads to other oil-rich countries and the ensuing chaos disrupts crude oil production, gas prices could hit $5 a gallon by peak summer driving season, industry analysts say.

Benchmark crude oil prices soared Monday, rising about 6% to $95.39 a barrel for April contracts on the New York Mercantile Exchange as violence and a military crackdown spread in Libya, the first major oil-producer hit by a burgeoning anti-government movement. The increased violence prompted BP and Norway’s Statoil to pull oil workers from the besieged country.

“If this thing escalates and there’s a good chance that there’d be a shift in supplies, $5 gas isn’t out of the question,” says Darin Newsom, senior analyst at energy tracker DTN.

The average price of regular gasoline is expected to rise to $3.25 within a few days, says Tom Kloza, chief analyst at the Oil Price Information Service. That’s 2.5% above Monday’s national $3.17 average.

Gas prices are up 20% from levels a year ago but nearly 23% below the record $4.11 average set in July 2008.

While troubles in Libya and brewing unrest in the Middle East are fueling higher crude prices, other catalysts are driving gas prices. The U.S. economy, higher traditional consumption in spring and rising demand from China and other countries are likely to push gas to $3.75 to $4 a gallon by midsummer. Political upheaval in Saudi Arabia, Iran, Kuwait and the United Arab Emirates has energy markets braced for an even sharper run-up.

“If you are looking at the disruption of movement and production in countries such as Saudi Arabia and the UAE, you’re easily talking $5 gas,” says Peter Beutel, president of energy adviser Cameron Hanover. “We have all the wrong things working together at the right time: an economic recovery, (stocks) making new highs, a lower dollar, strong seasonal demand and unrest in the heart of oil production.”

Speculators are also propelling oil. After profiting on soaring cotton, coffee and corn futures, traders are exploiting the energy market. “The flow of money plays an enormous role in the direction, speed and volatility of these markets,” says Darin Newsome, analyst at energy tracker DTN.

Kloza expects prices to peak at $3.75 a gallon by the Memorial Day weekend. “No question, they’ll climb further,” he says. “But if prices move too high, consumers will cut back, and prices will fall. It really alters consumer psychology.”

The economic impact could be huge.

“Above $4 a gallon, we’ll see consumers hunker down,” says Moody’s Economy.com economist Ryan Sweet. “It could take steam out of spending just as consumers were getting their sea legs.”

AAA spokesman Troy Green says speculation on gas prices is premature. “I would caution folks in the prediction business,” he says. “Throwing out numbers is akin to predicting who’s going to win the Super Bowl in 2012.”

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