$2.10 a gallon?! How gas prices got so high

From Portland, Ore., where regular gas costs up to $2.09 a gallon, to Forestville, Md., where drivers are paying as much as $1.74 a gallon, consumers are getting drained in their wallets and socked in their tanks. Nationally, gasoline prices are now 18 cents a gallon higher than they were a month ago, and 31 cents a gallon higher than at this time last year. A search on Gas Buddy.com found a Union 76 in Phoenix, posting unleaded at $3.79 a gallon in the wake of a ruptured pipeline. Holy SUV!

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"This is like a consumption tax on consumers," says Fred Dixon of the brokerage house D.A. Davidson in Lake Oswego, Ore., where he recently paid $1.95 for a gallon of fuel. He suspects that fuel prices could even dampen retail sales this quarter: "Six weeks of higher gas prices may eat into demand," he says. It could be a hidden drag on the economy."

Indeed, soaring prices affect almost all Americans, whose 240 million vehicles consume 5.8 billion gallons of fuel each week - at an extra cost, given current fuel prices, of about $1 billion. If the price hikes hold steady, figures Standard & Poor's chief economist David Wyss, they'll nearly balance the tax cut, at about $60 billion this year.

Why gas prices just won't tank

The current gas spike comes as a surprise to many analysts. On Aug. 8, the Energy Information Administration wrote that gasoline prices would remain stable for the next two months and then decline. Now, Neil Gamson, an energy economist with the EIA, warns that higher prices may still be coming up. "We have some way at the pump to reflect higher spot prices," he says. "How much higher is hard to say because after Labor Day, demand starts falling off and imports could start to come in."

But surprising as they are to some, there are lots of reasons for rising prices.

Crude oil prices have stayed higher than expected, in part because it's taken longer to get Iraq back on line. In addition, about 300,000 to 400,000 barrels daily of Nigerian oil production are curtailed because of local political turmoil. At the same time, Venezuelan oil production has not returned to prestrike levels. And on top of everything else, OPEC has cut back on quotas, says John Felmy, chief economist at the American Petroleum Institute (API).

The tight supplies coincide with relatively low inventories. Last week, the API reported crude-oil stocks at 279.3 million barrels - just barely above the level the government considers necessary for the operation of refineries. Gasoline inventories are also low, but home-heating oil levels are starting to rise as companies prepare for winter.

The tightening supply situation may be tied to an improving economy. Some economists believe the nation's gross domestic product (GDP) is now rising as much as 4 1/2 to 5 percent annually - double last quarter's rate. Mr. Felmy estimates that for every 1 percentage point increase in the GDP, there is a 0.4 percentage point increase in energy use. This could mean that the energy demand has increased by nearly 1 percentage point.

"There is no question [that] economic growth globally has led to an increased demand for energy," he says.

Drawn to the pavement

In the US, Americans also appear to be driving more. The beginning of the summer was very wet in the East, curtailing some trips. But now, with a scorching August, people are traveling more, says Gamson.

This can be seen in the parking lot at the Grand Canyon Railroad in Arizona, where business is up by about 15 percent over last year.

"With terrorism alerts and the economy bad, people are visiting state and federal parks that they would normally not visit if they are going to Rome, Singapore, and London," says Tom Ripp, vice president of sales. "America is just plain driving."

And Americans are driving despite high fuel prices. In the Phoenix area, prices soared when a pipeline ruptured in the middle of a housing development. This reduced the amount of gas flowing into Phoenix by 60,000 barrels per day - over a third of the area's normal daily consumption.

Ripples: Arizona to a Modesto harpist

According to Gas Buddy.com, the average price in Phoenix is now $2.10 a gallon, compared with $1.70 nationally.

That's the price if you could get gasoline to buy it. Phoenix resident Daniel Duran says 45 percent of the gas stations in the area had no fuel last weekend. "There were fights and three-hour lines," says Mr. Duran, the manager of the Pinon Grill in Scottsdale. "My wife and I set our alarm for midnight to go fill up the car."

To meet demand, refiners moved fuel from southern California. But this had a ripple effect up and down the West Coast, raising fuel prices in areas where gas was diverted: Gasoline now costs up to $2.10 a gallon in the San Diego area.

Californians, who drive a lot, consider the result a real nuisance. Donelle Page, a professional harpist, drives about 4,000 miles a month to play at symphonies, weddings, and parties. Recently, the Modesto resident filled up her minivan to the tune of $39. "It has made an extreme difference in my life," she says. "You can't just change your prices because your costs are up."