Big surprise: They’re up and heading higher. Nationally, gasoline prices – which averaged $2.76 last summer – are forecast to be at least $1.10 higher this summer, as the U.S. Energy Information Administration (EIA) predicts a vacation-dampening average of $3.86 a gallon.

The EIA is also suggesting that there’s a 33 percent chance prices could go even higher, exceeding $4.00 a gallon during the summer months, and that some areas of the country could exceed the national average by $0.25 a gallon.

Regarding diesel, the EIA says it will average $4.09 a gallon this summer. Clearly the analysts missed the boat on that one: Diesel’s already $4.29 where I live.

[ad#Google Adsense]Surprised by the sticker shock? I’m not. Back in December 2010, I predicted this would happen (to Oxford Club subscribers). And that was before tensions rose in the Middle East and Japan suffered its triple disaster.

Like me, the chart below from the EIA will probably leave you with feelings of déjà vu circa 2008…

(Source: Energy Information Administration, Short-term Energy Outlook)

We’re just about at the EIA’s forecasted price for gasoline a few months ahead of schedule, and we’ve already blown through its estimates for diesel…

A Pump Drunk Society of Gas-Guzzlers

Earlier this week, I did a little informal gas price survey of my own while out running errands.

Almost everywhere, the price was $3.79 a gallon… except for one place.

This gas station was at an intersection with a station on each corner. Three of them were $3.79 a gallon, and this one was $3.75… $0.04 less than the other three.

All of the stations had multiple vehicles at them, their owners mindlessly filling up. At least the people at three of them were mindless. It’s a statement as to how insulated the general public has become when it comes to the price of gasoline.

Gasoline and diesel – like food – are things most of us who live outside city limits need. So we just pull up to the pump and buy them.

Few of us give little thought as to where the fuel comes from, how it gets to the station, who gets the money and, now apparently, even how much we have to pay for it.

Has the gasoline-buying public become pump drunk? Do people just not care any more, thinking the price will come down? Well, this hope isn’t going to happen. In fact, the price could go a lot higher than $4.00 a gallon.

And at what price will folks begin to “sober up” and pay attention? It’s anybody’s guess, but the prospect of $4.00-a-gallon gasoline seems to be less of an issue today than it was back in 2008.

Gas Will Be More Than $4.00 a Gallon All Summer

So where is gas going from here? Predictions are all over the map, of course, but here’s why – at least in the short term – you’ll be paying more for gasoline.

Demand will be greater than last year: The EIA is projecting a daily demand this summer of 9.3 million barrels per day (mbpd). That’s an increase of approximately 45,000 more barrels per day (bpd) over last summer.

Distillate fuel consumption is also going up. This metric has a strong correlation with economic growth. Perhaps not too surprisingly, the EIA expects it to be 87,000 bpd higher than last year.

A recovering economy and an increase in population are factors that tend to push gasoline and other fuel consumption up, while higher prices and any increase in the Corporate Average Fuel Economy tend to push them down.

Fuel inventory levels are a big part of the equation, too. We’re not talking crude inventories, but finished product inventories.

  • The EIA estimates that we’ll have approximately 215.7 million barrels of total motor gasoline at the start of the summer driving season.
  • That’s down about eight million barrels from the year prior, and that’s in the face of increased demand.
  • More importantly, the EIA is predicting the total average daily draw over the summer to be 48,000 bpd compared to 26,000 bpd draw last year.
  • Net imports of finished gasoline are also expected to be down by 70,000 bpd versus last summer.

Higher prices are also a result of what the refiners have to pay for the raw crude to start with. Last summer, they were paying $75 a barrel. This summer, the EIA predicts they’ll be paying $112 a barrel. This is a rather staggering increase in supply costs.

As a result: The combination of higher crude prices, higher usage rates, lower import rates and higher stock draw-down rates will all contribute to higher prices this summer.

The Best Way to Play the Fuels Price Rise

Planting yourself in the middle of the energy supply chain might be your best bet in the near term. It’s the gasoline refiners like Valero Energy Corporation (NYSE: VLO), Tesoro Corporation (NYSE: TSO) and even Sunoco, Inc. (NYSE: SUN) that you should research and, not just large-scale oil exploration and production companies.

Why? Even in the face of higher crude acquisition costs, the EIA predicts refiners’ margins will be significantly higher this year. Last year, refiners’ margins averaged $0.35 a gallon. This year, the EIA predicts they’ll average $0.53 a gallon, or over 51 percent higher. Diesel margins are expected to average $0.60 a gallon this year versus $0.40 a gallon last year.

From an investment standpoint, oil refiners look like they could be reporting higher profits in the months and weeks ahead. With the summer driving season approaching, that should translate into higher share prices for investors.

Good investing,

— David Fessler

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Source: Investment U