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Gas prices likely to stay high for driving season

With the summer driving season just getting under way, gasoline stockpiles are running well below normal for this time of year and prices are setting new records weekly. And until supplies catch up with demand, it's looking like a long, hot summer of high gas prices — well above $3 a gallon in most parts of the country.  By's John W. Schoen.
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With the summer driving season just getting under way, gasoline stockpiles are running well below normal for this time of year and prices are setting new records weekly. And until supplies catch up with demand, it's looking like a long, hot summer of high gas prices — well above $3 a gallon in most parts of the country.

The latest numbers from the Energy Department pegged the average price of a gallon of regular gasoline at $3.218 — up 11.5 cents in a week and 32.6 cents higher than a year ago. Even adjusted for inflation, the highest price ever reached for gas was $3.22 a gallon in March 1981, just after the outbreak of the war between Iran and Iraq.

Those persistently high prices have sparked outrage among consumers, who have generated enough heat among lawmakers to win backing for a first-ever bill that would ban price gouging nationwide. The bill passed the House Wednesday, although it still has to pass the Senate, and the White House is threatening a veto.

Despite the record-high gas prices and the rhetoric on Capitol Hill, it's far from clear whether any price-gouging is happening, because supplies are unusually tight.

Refiners normally try to stockpile gasoline in the spring to get ready for the peak in demand as drivers hit the road for summer vacations and warm-weather industries like construction pick up steam.

But this year, with the summer driving season just getting under way, gasoline inventories are well below their five-year averages for the end of May. Inventories fell 15 percent between the beginning of February and the end of April — their biggest three-month drop on record, according to the Department of Energy.

The reason: Strong demand and high prices abroad cut into the flow imported gasoline. And a series of refinery outages — some of them scheduled maintenance and some the result of accidents, fires or other unplanned shutdowns — also severely crimped production.

And even as prices have zoomed past $3 a gallon, there has been no letup in demand. As of mid-May, demand was running 1 percent higher year-ago levels, according to the Energy Department.

In the past few weeks, refiners have begun to catch up, more capacity is expected to come online in coming weeks and inventories are slowly building. Imports have also begun to pick up. But with inventories at such low levels, it may be hard for supplies to catch up.

“With gasoline inventories likely to remain low all summer, retail prices are expected to remain close to $3 per gallon during the entire summer season,” the Energy Department said.

Some drivers — including those who tried to organize an unsuccessful “boycott” of gasoline retailers on May 15 — are crying foul, blaming refiners for deliberately reducing capacity to create tight supplies and drive up prices. Refiners say at these prices that just doesn’t make sense.

“All this talk about some sort of conspiracy, it does not pass the economic test,” said Charles Drevna at the National Petrochemical and Refiners' Association. “Refiners want to be operating these days. ... They would like to be doing more because they would like to be making more money.”

Skeptics also suspect that the industry has deliberately kept refining production capacity tight by not building enough new refineries. While it’s true that no new refineries have been build in nearly 30 years, the industry has been adding capacity to existing plants for the past 10 years.

Prior to that, refiners suffered from a surplus of capacity that made it tough to make a profit, according to John Kilduff, an energy analyst at Man Financial in New York

“The fact refineries weren‘t built or were shut over the past 20 years was reflective of a horrible environment,” he said. “One of the companies I worked for years ago, we made more money selling asphalt than we did selling gasoline.”

In the past few years, refiners have been investing heavily in new equipment to meet tougher environmental standards calling for lower sulfur content. But those upgrades have not increased capacity.

With those upgrades out of the way, there are now billions of dollars worth of ongoing and planned expansion that will add as much as 1 million barrels a day of refining capacity over the next few years.

But that won’t come soon enough to head off the political heat that’s building in Washington. The House Wednesday passed a bill that would ban price gouging nationwide.

“All we're saying in the price-gouging legislation is, ‘Look, if it's an honest price we're willing to pay it,’” said Rep. Bart Stupak, D-Mich., the bill’s sponsor. “What Americans get upset about, they pull up at one gas station, they go down the street and see it much, much lower. They say, ‘What is going on, and why do every spring we go through these cycles of high gas prices?’”

Though more than half the states have laws outlawing price gouging, those laws are usually invoked only after a special emergency is declared — like a hurricane or winter storm — that creates a short-term spike in demand.

The proposed federal law would require a similar emergency declaration from the president. The law would ban “unconscionably excessive” price increases.

Gasoline retailers say they could bear the brunt of any legal action under such a law — even though they have little control over the price they have to pay. Some 95 percent of retail stations are independent businesses — and 60 percent of those are single-store, mom-and-pop operators, according to John Eichberger, director of motor fuels at the National Association of Convenience Stores.

“The legislation that Congress is introducing is very noble in its intent,” he said. “We just want to make sure that it is crafted in such a way that allows honest retailers to continue to make business decisions based on market forces.”