Gas Prices Continue to Soar

JUDY WOODRUFF:

Thank you, Gwen. It's a little bit like coming home. I appreciate it.

Well, all of us who drive got some bad news from the government this week. The Energy Department forecast yesterday that gasoline will average $2.62 a gallon this summer. That is 25 cents higher than was the average last summer. The American Automobile Association puts the national average right now even higher, $2.70.

Now, these high prices come at a time when the price of crude oil is nearing a seven-month high of over $70 a barrel.

To discuss what's behind the higher prices, I'm joined by John Kilduff. He's senior vice president for energy risk management at Fimat USA. It's a global financial services company.

Mr. Kilduff, thank you for being with us.

JOHN KILDUFF, Energy Risk Management Group Senior Vice President, Fimat USA:

Thank you, Judy.

JUDY WOODRUFF:

So, the U.S. Energy Department forecasting $2.62 average a gallon this summer. Does that sound about right to you?

JOHN KILDUFF:

Unfortunately, it sounds a little low to me.

I happened to be on a teleconference with one of their top analysts. And, unfortunately, they're not allowed really to factor into their equation some of the real exogenous events that — that could occur that the open market and futures markets are pricing in right now to the price of gasoline, and crude oil, for that matter.

JUDY WOODRUFF:

What — what sort of events are you talking about?

JOHN KILDUFF:

I'm talking about some of the — the geopolitics in particular that are going on right now, the — the nuclear showdown with Iran, the — the continued attempts to bomb oil facilities in Saudi Arabia, and the potential for success on that front.

Also, there's a situation in Nigeria where some 600,000 barrels of some of the most precious crude oil in the world is — is offline right now, due to rebel attacks in that country.

And there's just a round robin of other countries that — that fill in this worry gap from time to time that you have to factor in, really, if you're going to be an active market participant. But I think it — the government is somewhat handcuffed in evaluating that fully.

JUDY WOODRUFF:

Now, how much of all that, Mr. Kilduff, is real, is happening right now? We know the Nigeria situation. That — that oil is truly offline, as you say. It's not available, right?

JOHN KILDUFF:

That's right. That — that's the real problem confronting the market right now, in — in a marketplace where there's no room for error.

Nigeria's oil really is of a variety that's — that we refer to as being light and sweet, in that it — it's very low in sulfur and can be — is ideally suited for gasoline manufacture, which the American public is just gobbling up at the particular moment.

Other countries coming to the rescue of that, like Saudi Arabia, produce a much heavier, sulfur-laden crude that just can't replace that Nigerian crude. So, that's a real problem for the market. And the developments in Iran right now, while they're more imagined, because we haven't lost any of their oil, there is just several scenarios there that almost boggle the mind, in terms of what they could do to the price of oil.

JUDY WOODRUFF:

And even though those are hypothetical?

JOHN KILDUFF:

Even though those are hypothetical, Judy, because the — the president of Iran was elected just last year. He's a hard-liner. And he has come out — he came out right after his election last year and said he would be more than willing to have his country play the so-called oil card.

And, by that, he means to withhold oil from the global markets. And if Iran were to do that, in the slightest degree, that would send crude oil off to the races, even higher than it is now; $80, $90, $100 would be easily eclipsed.

JUDY WOODRUFF:

So, how does all this, as you describe what is going on, on the world scene, translate into higher oil prices? How does that work?

JOHN KILDUFF:

Well, basically, people in the industry, hedgers, investors who are worried about what oil — higher and higher oil prices can do to their other investments or — or their operating abilities are — are buying now, ahead of the — ahead of the rush, if you will, or ahead of the crisis.

So, as — as some of these issues come to the fore and then back off, you see oil prices rise, and sometimes fall. I liken it to climbing or scaling back down a real wall of worry over the various country issues that we just discussed.

JUDY WOODRUFF:

But, then, you know, we're talking about oil prices. We started out talking about the price of gasoline. How does this translate to — to higher prices at the pump?

JOHN KILDUFF:

Well, obviously, gasoline is — is made from crude oil. I like to say that, if — if the flour is real expensive, the cake is obviously going to be ever higher in price as well.

But what's — what's happening there, separately, because the gas — the price of gasoline relative to crude is — is outpacing it. Gasoline is more expensive relative to crude right now than — than we have seen, for a couple of reasons.

Principally, we're still paying the price for the — the horrific hurricanes that hit our refining sector in the latter part of last year. Our refinery run rate is only about 85 percent. To put that in perspective, it's usually well above 90, sometimes as high as 95, 96. So, we're behind the eight ball at a time of very resilient demand from the American motoring public, in spite of very high prices at the pump right now.

It's — it's something of a conundrum — pardon that overused word these days — but for us in the oil market. Secondarily, there's an environmental issue going on right now. The government is eliminating the use of a particular oxygenation additive, a clean-air additive, called MTBE, and forcing the use of ethanol, which is made from corn.

The problem is that there's not enough ethanol being made.

JUDY WOODRUFF:

And, so, just to recap very quickly here, your forecast on the price of gasoline this summer?

JOHN KILDUFF:

Most people, unfortunately, will be paying $3 a gallon or more. There could be substantial price increases. And if any of these geopolitical event goes south, look out.

JUDY WOODRUFF:

Well, a pretty grim picture.

John Kilduff, he is with Fimat USA.

Mr. Kilduff, thank you very much.

JOHN KILDUFF:

Thank you. Thank you for having me.