Ric Francis  /  AP
Steam flows from a ConocoPhillips' refinery in Los Angeles. Oil refiners are running at nearly full capacity to keep up with demand for gasoline and diesel fuel.
By John W. Schoen Senior producer
msnbc.com
updated 4/7/2005 2:14:57 PM ET 2005-04-07T18:14:57

Fueled by strong demand and surging crude oil prices, the average price of gasoline price in the U.S. is expected to rise to $2.35 in May and then ease, according to the government's annual forecast for the summer driving season.

American drivers will burn through an average 9.3 million barrels per day of gasoline this summer -- up 1.8 percent from last year, according to the U.S. Energy Information Administration. That would be higher than the five-year average, the agency said.

"Refiner output increases are not expected to keep up with demand growth due to limited growth in refinery capacity," the report said.

Imports will have to make up the difference, rising 4.7 percent from last year. About 10 percent of U.S. gasoline demandis currently met by imports.

But those foreign supplies "may be harder to obtain than in previous summers and are expected to be costly," the EIA warned.

Video: Summer fuel factors Predicting a summer rise in gasoline prices is a little like forecasting a heat wave in August. While it’s almost certain to happen, it’s all but impossible to know just when and how bad it will be. Last year at this time,the government forecast summer gas prices would hit $1.81 before backing down. In fact, summer prices eventually peaked at just over $2 a gallon.

Pump prices on the West Coast have already hit an average of $2.40 a gallon. (Prices of refined products are generally higher west of the Rockies because of added transportation costs; there aren't enough refineries locally to meet demand.) Prices are lowest in Texas, home of the biggest concentration of refineries, where gas is still selling for just under $2 a gallon. [Correction: As of the week of April 4, the lowest gas price recorded by EIA was in Houston, at $2.08 a gallon]

Nationwide, the national average price of unleaded regular this week hit $2.22 a gallon, up from $1.78 a year ago, according to EIA. And some analysts are already forecasting price will move higher than the EIA's summer forecast.

“Barring a reversal (of the run-up in crude prices), a jump in the retail pump price to $2.45 a gallon by Memorial Day — the traditional start of the summer driving season and the traditional seasonal peak for gasoline prices — now seems likely,” Morgan Stanley chief economist Richard Berner wrote in a report this week.

Motorists and businesses aren't the only ones who are feeling the squeeze from higher pump prices. The relentless rise in energy costs is beginning to put pressure on Congress and the White House. Energy Secretary Samuel Bodman, on Capitol Hill Tuesday to meet with legislators about the administration's long-stalled energy bill, said the White House is working to speed construction of new refineries and spur investment in alternate energy sources.

The Bush administration plans to allow oil companies to drill in areas off the Florida coast that are currently off-limits beginning in 2007. Sen. Lamar Alexander, R-Tenn., on Wednesday proposed legislation that would give governors the power to open some or all of their states’ offshore lands restricted by federal moratoria.

But Bodman said there is little Congress or the White House can do to ease higher energy prices in the short term.

“There is nothing of which I’m aware,” he told CNBC.

Usual suspects
The rise in gasoline prices can be traced to most of the usual suspects, especially the surging price of crude oil, which recently hit $58 a barrel before backing a few dollars by Tuesday’s close.

“Around this time last year we were at about $35 a barrel, so you’re looking at a $20 difference in oil prices year over year,” said Jacques Rousseau, an analyst who follows the oil refining industry at Friedman, Billings, Ramsey in Houston. “So about 50 cents of today’s gas price represent the increase in crude prices since last year.”

Oil consumption typically dips this time of year between the peak demands of winter heating and summer driving in the northern hemisphere. But with global demand closer than ever to production capacity, U.S. oil prices have surged by more than 30 percent this year. A Goldman Sachs analyst last week predicted prices could spike above $100 a barrel.

Revving up demand
To help meet the peak demand for gasoline during the summer driving season, refiners typically begin building up inventories this time of year to head off summer shortages. Those stockpiles are currently higher than last year, but so is demand. Adjusted for that increased consumption, refiners have stockpiled just 24.5 days worth of demand, just slightly ahead of the five-year low of 23.8 days for this time of year, which was hit last spring, according to Rousseau.

“It’s not like anybody is holding back production,” said Rousseau. “(Refiners) are operating at 90-plus utilization rates and producing as much product as they can.

With refiners running near maximum capacity, any production cutbacks for maintenance or accidents would likely further tighten supplies. An explosion last month at a Texas BP refinery , the nation’s third largest, killed 15 people and severely damaged some refining equipment. But company officials have said production cuts will be less than 5 percent.

Many low- and middle-income households are feeling the impact, avoiding discretionary trips and cutting back elsewhere.

“Looking at their monthly budget, the extra few dollars at the pump or the extra few dollars to heat their homes does have an impact,” said Goldman Sachs Abby Joseph Cohen. “Consider when you go back to last Christmas season, many of the retailers that work with low and middle-income households were reporting that the demand for their goods was not as strong as they had hoped.”

But demand for gasoline has also remained strong, say analysts, because despite the rapid price rise, it’s still relatively cheap in the U.S. Adjusted for inflation, gasoline prices would have to hit $3.00 to match their peak in March, 1981.

Higher fuel prices haven’t slowed the growth in overall demand in the U.S. — now more than 380 million gallons a day. That's partly because gasoline purchases make up a relatively small portion of the average American's household budget — less than 5 percent of consumer spending, according to the Bureau of Labor Statistics.

Unlike other commodities, demand for gasoline is what economists call “inelastic” — you need to drive to work, and you can’t switch overnight to a higher-mileage car. Fuel-sipping gas-electric hybrids have gotten a lot of attention lately in auto showrooms, but of the roughly 17 million passenger vehicles sold this year, the number of hybrids can be measured in the tens of thousands.

With the economy in relatively good shape, so are consumers’ vacation budgets, say analysts. If that keeps up, demand for gasoline during the peak driving season is expected to continue to grow.

“If you look at a typical family of four going on a vacation, when the budget is $400-$500, I just don’t think that $20 either way is going to make or break the trip,” said Robert LeFleur, who follows the travel lodging industry at Susquehanna Financial Group. “If gas hits $6 a gallon, all bets are off.”

What’s up with diesel?
Owners of diesel-powered vehicles — accustomed to seeing that grade of fuel sell at a substantial discount to gasoline — have been frustrated and perplexed by the sharp rise in pump prices. The average price of a gallon of diesel hit $2.30 this week — up 65.5 cents from a year ago.

Part of the rise can be explained by the strong U.S. economy, say analysts. Just about every product sold in the U.S. eventually winds up in a tractor trailer or railroad car powered by diesel. With the U.S. economy humming along, so is demand for diesel.

Strong demand in Europe, where car owners prefer diesel engines in greater numbers than in the U.S., has also stoked demand for U.S. exports of diesel, further tightening markets here. Because of the relatively high demand for diesel, European refiners typically have spare gasoline to export to the U.S., which has helped keep gas prices from rising even further.

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