Why gas prices take a big jump

Price spike at the pump stems in part from war jitters over Iraq and resurging demand at home, as economy recovers.

Those prices you're seeing at the pump are not an early April Fools joke.

Even before the summer driving season kicks off, gasoline prices are moving up, and could go significantly higher at least through Memorial Day.

Prices have risen by as much as 15 cents a gallon over the past two weeks, to $1.29 nationally. Experts believe they could jump another 10 to 12 cents a gallon in the next few weeks.

A spring uptick at the pumps has become an annual event. But the recent increase – the first substantial spike since Sept. 11 – involves some unusual factors and comes at a sensitive time for the US economy.

If prices rise too much, they could crimp the pace of the nascent recovery.

Already, the money outflow stemming from the higher prices is significant. "It's worse than a tax increase, because we are essentially writing a check to the foreign oil producers," says Mark Zandi of Economy.com, an economic website. "With a tax increase, presumably the government does something good with the money."

In December 2000, when oil prices were high, the nation spent $360 billion on energy. One year later, with the economy in recession, it spent $70 billion less, or equal to about 3.5 percent of the federal budget. Mr. Zandi estimates the nation's oil tab is now back up to $310 billion and rising. "Lower energy prices helped to mitigate the recession. Now higher prices will make it more difficult for the economy to get traction."

Behind the rise are several factors, including crude-oil prices that have been driven higher, in part, by tension over Iraq. The economic recovery, meanwhile, is buoying consumer demand. It hasn't helped that some of the nation's refineries are down for maintenance. And Americans bought a record number of cars last fall, thanks to dealer incentives. Now they are putting some miles on their odometers by driving on spring-break trips, and buying more fuel than usual.

Midwest supplies up

But, there may be some good news as well. Unlike recent summers, gasoline prices in the Midwest should remain about on par with the nation, thanks to a new pipeline. Last year, prices near Chicago spiked much higher than the US average because of problems getting fuel to the region.

Moreover, unlike past years, oil companies will enter summer with higher-than-normal inventories, providing a cushion in the months ahead.

Despite the added inventory, in recent weeks oil companies have been paying higher prices for crude oil, which closed Monday at about $24 a barrel, up from a low of about $18 a barrel. Because of the higher crude prices, gasoline prices should continue to rise, probably by another 10 to 12 cents a gallon by the first weekend in May, says Jacob Bournazian, an analyst at the US Energy Information Administration, part of the Department of Energy. "It should be more gradual, maybe only an increase of 1 or 2 cents a week," he says.

After May, future price hikes will depend heavily on what happens in the Middle East. There are still reports in the papers that President Bush is intent on toppling Iraqi strongman Saddam Hussein. This has kept the oil markets nervous. "If there is a military invasion, no doubt prices would rise instantly," says John Lichtblau of the Petroleum Industry Research Foundation.

Oil exports from Iraq are down as much as 500,000 barrels per day anyway, since Mr. Hussein is still protesting the UN food-for-oil plan. The UN program is up for renewal on May 30. "In a tight supply-and-demand situation, the Iraqi oil is enough to keep prices up," says Adam Sieminski, an energy analyst at Deutsche Banc Alex. Brown in Baltimore.

In fact, Mr. Sieminski wonders if oil prices may go up later in the year as the world economy continues to improve. "If you assume inventories are down in the second half, that means higher prices ahead." The OPEC cartel does not plan to meet again until June 26 to review quotas. By the time OPEC nations increase production, prices could be higher.

Consumers keep driving

In the meantime, consumers are noticing the higher gas prices. Brad Proctor, president of GasPriceWatch Inc., which uses volunteers to keep track of prices, says people are starting to write their lawmakers. "It's too significant an increase in too short a time," says Mr. Proctor, who is based in Dayton, Ohio.

But he says higher prices have yet to change consumer behavior as they did last June, when fuel prices were just under $2 a gallon. "People made sure they drove the more efficient car and left the SUV in the garage," he says.

Indeed, interviews with drivers in Manhattan found few people cutting back. James Bolding of Springfield, Va., says he drives 60 miles round trip per day to get to work. "There's no public transportation, so I have to bite the bullet," he says. Sue Teneyck, a New Jersey resident, says she doesn't like the higher prices, but can't see any way around them. "My husband runs his own excavation business, so we feel it," she says.

New Yorker Sean Woods says he's started to cut back on his driving. "And, when I do get gas, I like to fill it up. It costs about $35 to $40 to fill the tank, but I get better mileage," says Mr. Woods, driver of a Chevy Tahoe.

Proctor laughs at this popular misconception that full tanks help efficiency. "He'll get better mileage if he leaves the Tahoe at home."

• Monitor intern Lynette Wilson contributed to this story.

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