Continued steady world oil demand growth, combined with only modest increases in world spare oil production capacity and the continuing risks of geopolitical instability, are expected to keep crude oil prices high through 2006. The price of West Texas Intermediate (WTI) crude oil is projected to average $65 per barrel in 2006 and $61 in 2007. Retail regular gasoline prices are projected to average $2.50 per gallon in 2006 and $2.40 in 2007. Summer (April 1 to September 30) regular gasoline pump prices are expected to average $2.62 per gallon, 25 cents higher than last year’s average of $2.37 per gallon. Retail diesel prices are also expected to average $2.62 per gallon this summer.

World oil market conditions, growth in U.S. demand, and ongoing implementation of domestic fuel quality requirements are expected to keep consumer prices for motor fuels and other petroleum products high in 2006. Higher crude oil costs together with higher margins (retail price minus crude oil cost and taxes, per gallon) are also expected to contribute to increases at the pump. Higher gasoline margins are likely because: 1) gasoline consumption is expected to grow solidly following weak growth in 2005; 2) Tier 2 gasoline requirements mandate further reduction in sulfur content this year; and 3) phase-out of methyl tertiary butyl ether (MTBE) from the gasoline pool is likely to put significant pressure on ethanol and gasoline prices. Higher diesel fuel margins are expected because of the additional cost of producing ultra-low-sulfur diesel fuel later this year.

By September 2006, fuel prices are expected to be much lower than last year because of the crude oil and natural gas production and refinery outages caused by Hurricanes Katrina and Rita in 2005. With another active hurricane season possible this year, news of any developing hurricanes and tropical storms with a potential to cause significant new outages could add to volatility in near-term prices in the latter part of the summer. The projections in this outlook do not reflect a scenario with significant new production or refinery outages. Natural gas prices are projected to be down sharply during the late summer and fall compared to the hurricane disruption-related highs of 2005. The expected average for 2006 for Henry Hub spot prices of about $8 per thousand cubic feet (mcf), while down about $1 from the 2005 average, is still well above the pre-2005 historical maximum of about $6, reached in 2004. The outlook for 2007 includes Henry Hub average prices moving closer to $8.40 per mcf, assuming normal weather and continued economic expansion in the United States.

This forecast has been reprint with permission from the DOE. For expanded information
from EIA, contact Mark Rodekohr at mark.rodekohr@eia.doe.gov or Neil Gamson at neil.gamson@eia.doe.gov. Or, visit the EIA website at www.eia.doe.gov/steo.