US gas prices pass $3 mark. Will anything stop them from climbing higher?

Declines in domestic and foreign production are to blame for higher US gas prices, analysts say. Some in the industry see $5-a-gallon gas in 2012, while others say supplies will increase to halt the rise.

Paul Sakuma/AP
Gas prices earlier this month in San Francisco. The average price for gasoline nationwide is now over $3 a gallon, according to the US Department of Energy.

Increased demand and declining supply are expected to keep the average price of a gallon of regular unleaded gas above $3 throughout 2011, but increased production from global refiners is expected to keep prices from increasing much further.

The US Department of Energy reported this week that the average price crossed the $3 mark for the first time since October 2008. The average national gas price for regular gasoline rose to $3.05 per gallon, a 7 cent increase from the previous week, while diesel fuel prices reached $3.29 a gallon, a 4.6 cent increase.

Gas prices peaked along the West Coast, where the average tank of regular gas reached $3.20 per gallon, with California pumps reaching $3.30 per gallon. The lowest gas prices were reported in the Rocky Mountain region at $2.80 per gallon.

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The recent rise in gas prices, analysts say, is largely due to decreased production both in the United States and abroad.

Some oil industry experts warn that gas prices still have a long way to rise.

Former Shell Oil President John Hofmeister predicted in a television interview this week that gasoline prices will reach as high as $5 per gallon by 2012, calling increased government regulations on domestic offshore drilling the main culprit.

Mr. Hofmeister’s dire forecast was confirmed in part by Tom Kloza, chief oil analyst with the Oil Price Information Service, which tracks gasoline, diesel and jet fuel prices for the petroleum industry. Mr. Kloza told CNN Money Tuesday that “we’ll see those numbers at some point,” but predicted that they will take place later in the decade.

Whether or not offshore drilling regulations are to blame, some official sources are predicting that drops in production will lead to reduced crude oil supplies in 2011. According to the US Energy Information Administration (EIA), domestic crude oil production will fall from 2010 levels by 30,000 barrels a day to an average level of 5.47 million barrels per day next year. The EIA prediction is based on forecasted drops in production both in Alaska and the Gulf of Mexico.

Even as production declines, consumer demand for fuel is expected to rise, according to the EIA. The agency forecasts that US gasoline consumption will grow about 1 percent in 2011. The combination of lessoning supply and increased demand will result in an average per gallon pump price of $3.23 for regular gas next year.

Phil Flynn, an analyst with PFGBest in Chicago, says that the return to $3 per gallon gas this month is due to several factors: an outage at an Irving Oil refinery in Canada, which is one of the biggest gasoline suppliers in the US; the closing of a refinery in St. Croix in the Virgin Islands; port and refinery strikes in France, which limited the volume of gasoline available for import; and routine maintenance at several domestic refineries along the East Coast.

Despite those factors, Mr. Flynn calls the prediction by former Shell executive Hofmeister of pump prices reaching $5 per gallon a “fantasy.” Flynn says instead that global imports will help cater to increased consumer demand.

Beyond 2011, Flynn says, domestic oil producers are expected to increase production to keep up with foreign competitors.

The American Petroleum Institute also paints a brighter picture, reporting this month that the number of domestic oil rigs operating in November represented the year’s highest to date. It also reported that domestic oil production in November, at 5.44 million barrels per day, was the highest for any November since 2003.

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