Why gas is $1.49 in Idaho and $2.20 in Chicago

Refinery problems add to Midwest costs. Prices will go up before down.

Americans planning to take to the road this summer may end up burning more holes in the their wallets than rubber on the road.

With peak travel season fueling the heaviest demand for gasoline in decades, pump prices coast to coast (averaging $1.56 per gallon) are close to the all-time high set in 1981. In pockets of the Midwest, including Chicago and Milwaukee, they have ballooned to well over $2. Worse, they are expected to rise higher - perhaps another 10 cents - before easing off a bit in August.

So far, analysts say the record prices aren't altering driving habits in today's high-octane economy. But tensions are still running as hot as an Arizona highway, touching off a level of finger-pointing not seen since the days of Jimmy Carter. Some blame regulations calling for reformulated gasoline. Others blame the OPEC cartel, gas-guzzling SUVs, or refineries with low inventories.

Already, federal agencies are seeking answers to the Midwest's extraordinary recent spike.

"This is one of those amazing situations where a number of key factors have converged all at once to produce very, very high prices," says Aaron Brady, analyst for Energy Security Analysis Inc. (ESAI), a market-research company in Boston.

Record demand is driven by the booming US economy and recovery in several Asian economies. With inventory depleted, more OPEC nations sticking together to keep production low, and court proceedings slowing output of reformulated gasolines in the US, experts say costs will remain high at least through August.

Despite moves this week by some Washington agencies and officials to examine pricing schemes - "We're suspicious of gouging," Environmental Protection Agency spokesman Dave Cohen said June 12 - no serious look into illegal activity is warranted, many analysts say.

"There's really no one culprit that travelers can blame for gouging them. There's no conspiracy," Mr. Brady says.

One culprit that some analysts see, however, is consumers themselves. With fat, steady incomes and a penchant for big sport-utility vehicles, drivers are not as deterred as they were in the oil-crisis that lasted into the early 1980s. In a June 7 Gallup poll, 52 percent of Americans said higher prices so far have not affected their driving habits or vacation plans.

"I had steeled myself to the fact that fuel was going to be more expensive than I thought," says Ken Vallance, a retired food-service executive who just finished a cross-country drive. "If you want to go, you have to pay the price."

But his philosophy hadn't prepared him for the mind-spinning price of $2.20 a gallon in downtown Chicago. (He drove on by.)

That came after he had filled his Toyota Camry with regular for $1.56 a gallon in Bend, Ore., and $1.49 in Pocatello, Idaho. Midwest prices aren't always higher, but Mr. Vallance had to fork over $1.61 per gallon in South Haven, Mich., and $1.58 near Cleveland.

"No one seems to know why" Midwest prices are out of sync, says Bruce Cavella, an oil analyst at Standard & Poor's DRI in Lexington, Mass.

But prices are headed higher nationwide, he predicts - to an average of $1.73 per gallon in July, tapering to $1.40 in August.

Indeed, analysts are clear on two broad trends: 1) the rising cost of crude oil, from which gasoline is made; and 2) the rising cost of refining the crude.

On the high cost of crude - now hovering about $31 per barrel - consumers can thank OPEC discipline.

"Cartel members have not only put tighter production limits on themselves, but unlike the past, they are sticking to them," says Dennis Eklof of Cambridge Energy Research in Massachusetts.

Even if OPEC nations boost production, it can take months for consumers to benefit.

In the refining sector, several factors are pushing up costs.

First, regulations since 1995 have tightened gas standards in cities where toxic emissions exceed federal limits. The new gas costs more to produce and requires changes at refineries.

"In an effort to get the cleaner air we all want, refineries ... incur a one-time cost," says Sarah Emerson of ESAI.

While some government officials have complained of inexplicable price differentials between conventional and cleaner-burning gasolines, several experts say the additional costs are warranted. Different methods of producing the cleaner-burning gasolines are also behind stark regional differences at the pump.

The average price in the Midwest for the cleaner gasolines is $1.83 per gallon, compared with $1.56 on the East Coast and $1.60 on the West Coast.

One factor behind this anomaly may be the Midwest's historic reliance on ethanol, an additive used in the last stages of blending gasoline to meet the new EPA requirements, which became law June 1.

Ethanol is costlier to transport than conventional gasoline. It also evaporates more quickly, and thus must be mixed with low-volatility gasolines to meet government standards. Those low-volatility gasolines are more expensive to make.

"This difference in the Midwestern approach to making and moving gasolines is pushing their costs far higher than the rest of the country," says Jonathan Cogan, spokesman for the US Department of Energy's Energy Information Administration.

A final curveball for gasoline markets is a court case regarding which refineries may produce the new, reformulated gasolines. Several years ago, UNOCAL won a patent on producing the gasoline, called RFG for short. Patent law holds that if other refiners such as Exxon or Sunoco also make RFG, they have to pay royalties to UNOCAL.

Despite a legal challenge, an appeals court several weeks ago upheld an earlier court ruling that such royalties be paid. Another appeal is expected but no ruling is likely until late fall.

"There is so much uncertainty in the gasoline market for fear of infringing on this patent that it is causing volatility in pump prices," Brady says. "Until the matter is resolved, it's going to continue to cast a pall over the market."

(c) Copyright 2000. The Christian Science Publishing Society

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