Gasoline Prices Poised to Surge This Summer

Gasoline prices could abruptly shoot higher during this summer’s peak driving season, crimping U.S. consumer spending even more than last winter’s spike in the cost of heating, economists said Thursday.

The prices for gasoline traded on U.S. futures markets have surged since late February, amid traders’ fears that fuel supplies are being drawn down at the same time drivers are about to step up their demand for gasoline.

The price increases are working their way to service stations. U.S. retail gasoline prices have already jumped to an average $1.50 a gallon nationwide, above the $1.49 price the Energy Department had expected for this summer, and the price is among the highest of the last two decades.

“Higher energy prices are going to continue to dampen both consumer attitudes about the economy as well as reach deeper into people’s wallets,” said Steven Wood, economist at FinancialOxygen Inc., a business advisory firm in Walnut Creek, Calif.

In Southern California, though, pump prices for gasoline have only lately started to creep higher as fierce competition in the region has helped keep a lid on prices.

After five months of small, steady declines, the average cost of a gallon of gasoline in mid-March rose 9 cents, to $1.69, the Automobile Club of Southern California said last month. (Prices in the region are higher than the national average because of the state’s environmental requirements.)

And as a result of the modest rise in pump prices in the West, Tosco Corp.--a leading refiner and distributor of gasoline in California and Arizona through its 76 and Circle K outlets--says its marketing operations are losing money. So it’s recently raised the wholesale price of gasoline it sells to its service-station dealers in the two states.

Tosco took the action because wholesale gasoline prices at the refinery level have soared in recent weeks just as they have in the futures markets--and at a much faster pace than retail pump prices are rising. The shortfall is occurring just as Tosco is preparing to be purchased by Phillips Petroleum Co. for $7 billion.

Nonetheless, California Atty. Gen. Bill Lockyer said he’s concerned that the Phillips-Tosco merger could push up prices for the main crude oil used by West Coast refineries and, ultimately, hike prices at the pump.

The deal not only would give Phillips a major retail presence in the West, but also give the Oklahoma-based oil giant Tosco’s refineries in California more crude from Phillips’ big production fields near Prudhoe Bay in Alaska, he noted.

“The Tosco acquisition may mean gasoline prices would stay even higher if Phillips has their own internal distribution system” in the West, Lockyer said.

Lockyer said his office hasn’t yet made a decision about whether to challenge the deal by requiring that the companies to divest some assets, a step he’s taken in the past to permit other oil companies to merge. Phillips’ takeover of Tosco, which was approved by both companies’ stockholders Wednesday, also is still under antitrust review by the Federal Trade Commission.

In the meantime, it’s not a sure bet that Tosco’s price increase in California and Arizona will stick. That’s because many of its dealers already are losing money on gasoline sales and aren’t happy they’ll have to pay even more to Tosco, and because it’s unclear whether Tosco’s competitors, such as Chevron Corp., will match its move, analysts say.

If its rivals keep their prices steady to gain market share at Tosco’s expense, Tosco might be forced to roll back its price hikes, said Frederick Leuffer, an analyst at Bear Stearns & Co. in New York.

“It’s an incredibly competitive market in California,” Leuffer said. “If you raise your price and your competitor doesn’t, you lose your buyer to the service station across the street.”

Wholesale refinery prices in California and Arizona have risen sharply because of tight supplies of gasoline and continued strong demand in the states. That’s good for Tosco’s own refinery operations in the West, which have been profitable, but not for its retail business.

Tosco, based in Old Greenwich, Conn., is “losing money in its retail gasoline sales” because of an unusually wide spread between the surging wholesale prices and relatively flat retail prices, Leuffer said.

In fact, he estimated that service stations in the Los Angeles area generally--not just Tosco’s--are currently losing 24 cents for every gallon they pump.

Clark Wrigley, a spokesman for Tosco’s marketing headquarters in Phoenix confirmed that “we’ve raised wholesale prices” because the company has “been losing money for a number of months and we’ve been selling our product below cost.” He declined to elaborate, but The Wall Street Journal reported Thursday that Tosco has raised its wholesale prices between 6 cents and 16 cents a gallon in the last two weeks, depending on the area.

Tosco’s stock fell 55 cents, to close at $42.80 a share, Thursday while Phillips Petroleum edged up 13 cents to $56.60 a share, both in composite trading on the New York Stock Exchange.