Demand may rise until oil hits $80

Crude-oil prices may have to rise to $80 a barrel or higher before U.S. demand for gasoline, diesel and other fuels begins to slow, said Arjun Murti, an analyst with Goldman Sachs.

U.S. motorists show few signs of curtailing their driving habits even with retail gasoline above $2 a gallon across much of the country, Murti said in an address yesterday at the National Petrochemical and Refiners Association annual meeting in San Francisco.

"Our view is that oil prices have to keep rising until the economy is impacted," said Murti, 35, a New York-based managing director at Goldman Sachs and co-leader of the company's energy group.

"At $80 oil, we might expect some negative reaction on the demand side."

Oil prices soared above $50 a barrel the past year as economic growth stoked demand in the U.S., China and India.

Prices also rallied on concern over supply disruptions in the Middle East, which pumps more than a third of the world's crude.

Crude-oil futures traded on the New York Mercantile Exchange reached a record $55.67 a barrel Oct. 25 and came within 2 cents of surpassing the mark last week.

The price for oil yesterday settled up 52 cents at $54.95 a barrel, up 47 percent over the past year.

Growth in oil production worldwide isn't keeping pace with demand, Murti said.

"We expect continued steady supply growth, but not a surge" in oil production, Murti said.

"We are not in any way suggesting that the world is running out of oil. We don't expect $50 to $85 oil to be likely" over the long term.

Oil at $80 probably would send U.S. pump prices for gasoline to about $2.75 a gallon on average, almost 70 cents higher than current prices, based on calculations from the Energy Information Administration, the statistical arm of the Energy Department.

The cost of crude makes up about half of the retail price of gasoline and diesel in the U.S., according to department data. Every $1 move in oil prices typically results in a 2.5-cent move in retail gasoline.

The average U.S. retail price for regular-grade gasoline jumped 5.7 cents to $2.056 a gallon last week, 0.8 cent below the all-time record reached in May, the Energy Department said.

A growing U.S. economy is spurring shipping and travel, and stricter environmental rules are limiting increases in refining capacity.

The nation's gasoline consumption has risen every year since 1991 and is expected to average a record 9.22 million barrels a day this year, according to the Energy Department.

Oil is still cheaper than it was in the early 1980s after adjusting for inflation, Murti said.

Gasoline makes up about 50 percent of U.S. refined-product consumption, he said.

"While supply will continue to grow, oil prices will have to go higher, gasoline prices will need to go higher, to really knock off demand," Murti said.

"We think we're going to need changes in consumer behavior, and it's going to take higher prices to do that. It's going to take a lot to change consumer behavior."