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U.S. Gasoline Prices Brace for Surge

NEW YORK ( TheStreet) -- Oil prices should continue to rise and lead to a spike in gasoline prices before the end of the year thanks to China's growth at breakneck pace, despite a series of interest rate hikes, according to analysts.

"If China continues to expand this way, I would expect [U.S.] fuel prices to go up 20 to 30 cents a gallon by the end of the year," said A.T. Kearney's head of energy practice Vance Scott. He factored in the U.S. recovery as he discussed oil demand from the world's most voracious energy consumer, as it feeds its rapid economic growth, and the impact of this demand on U.S. gasoline prices.

Demand can, of course, drive up crude oil prices, which then makes gasoline more expensive.

Since October, China has raised interest rates five times to stem inflation. Yet second-quarter gross domestic product came in better than expected, as did June industrial and retail sales data in the week of July 15.

Preliminary data from an HSBC survey of purchasing managers showed that the manufacturing sector of China may have shrunk for the first time in a year in July, but Scott largely shrugged off the data in connection with the gasoline price forecasts.

"I would be inclined to say that even if China slows in the second half, we're talking about a relative slowdown of a couple percent maximum of China's industrial output growth, at about 15% today, or GDP growth, at 9.7% today, so that probably pushes things to the low end of my range rather than nullifying the statement," Scott said.

Likewise, the anxiety surrounding the U.S. debt ceiling talks to avoid a default had done little to shake his belief that gasoline prices will continue to rise due to China's thirst for oil. The debt ceiling talks, says Scott, are driving crude futures lower, but on the order of just 0.2% to 0.5% depending on the contract.

"That translates to about a cent of gas. So even with the current uncertainty, the crude impact is pretty small ... the debt ceiling issue could impact prices from both sides for a small net effect."

Gasoline prices are heavily dependent on crude input costs, and the North American market has the advantage in this regard given the ability of refineries in North America to process cheaper, lower-grade crude oil. This contrasts with European refineries, which can generally take only cargoes of higher-quality, light sweet crude oil.
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