How high could cost of gas go?

Already, prices have set a seasonal record.

Americans are now paying just under $2 a gallon at the pump, the highest price they've ever paid at this time of year. And energy analysts predict that the price will keep rising right through the spring, closing in on $2.15 a gallon even before the summer driving season.

The high prices are already starting to take a toll on the economy, say economists, who compare them to a tax that saps disposable income. Last year, they may have subtracted as much as 0.5 percent from the nation's output, which translates into fewer jobs and less money for businesses to spend on expansion. "If high prices continue in 2005, they will continue to be a drag on growth," says Richard DeKaser, chief economist at National City Corp. in Cleveland.

Yet energy prices are high in part because the economy itself continues to motor on. The government recently increased its estimate of the growth of the gross domestic product in the fourth quarter to 3.8 percent, and many economists believe the economy is now growing at a 4 percent rate. This means that truckers, for example, are buying more diesel, which is 43 cents a gallon higher than a year ago.

For consumers, the impact of higher prices so far has been unusual. Americans are continuing to spend, but they are paying their higher energy bills by eating into their savings, say economists. The full impact of oil priced at more than $50 a barrel - it closed near $54 last Friday - may not have been felt yet: Businesses are absorbing much of their higher energy costs. "I think this year will be different," says Jay McIntosh, director of retail and consumer products at Ernst & Young, the accounting firm. "I think we'll see some inflationary pricing at retail on many items that have been deflationary for the last few years."

For many drivers, the prices at the pump could be causing angst. According to GasPriceWatch.com, the highest price in the nation is $2.79 a gallon in Bridgeport, Calif. Nationally, the organization finds prices are averaging $2.01 a gallon.

Some expect the numbers to keep rising because the wholesale price of gasoline has risen even faster. Analysts predict that this week, gasoline prices will rise by as much as 12 cents a gallon at the pump and another 12 cents a gallon by the end of the month. This could put the price at the pump at close to $2.25 a gallon nationally.

These higher prices are well before the traditional spring run-up, as refiners shut down to do maintenance and readjust pricing to reflect changes in their blends. In recent years, prices have risen 20 to 25 cents a gallon before Memorial Day. "The concern for us this year is we are starting off at such a high level," says Justin McNaull, a spokesman for AAA in Washington. "If we have another run-up, it would put us into record territory."

Few energy analysts expected this kind of scenario. In early February, the Energy Information Administration had anticipated crude oil prices falling to about $46 to $47 per barrel and remaining at that level for most the year. One of the keys to this projection, says Dave Costello, an analyst at EIA, is a drop in the growth of demand in China. "Their demand could be more than they are saying," he says.

Although good statistics from China are hard to get, analysts do know that US demand for oil is rising, probably about 2 percent this year or 400,000 barrels per day. A significant portion of this, says Mr. Costello, is related to higher diesel demand. "When the economy is growing, we need trucks," he says.

At the same time, some observers believe prices may be high because of speculation from individual investors and hedge funds. "Oil is keeping its value better than the dollar, so some hedge funds are putting their money into energy futures," says Rick Mueller, senior oil analyst at Energy Security Analysis in Wakefield, Mass.

If it were not for the speculation, some analysts believe oil prices would fall, since there are no supply shortages. OPEC is producing about 29 million barrels of oil per day, which is above its target. There are even estimates that the Saudis will expand production. "Surplus capacity could be between 1.6 million barrels per day and 2.1 million per day," estimates Costello.

OPEC meets in mid-March in Vienna to discuss its quotas. Originally, some oil ministers had discussed cutting production since worldwide inventories have been rising. "Now, OPEC is backpedaling and might increase production," says Mr. Mueller. "They don't feel comfortable with oil above $50 a barrel because they know over the long term it starts to cause some shifts - for example, people buying more hybrid autos, which use less gasoline."

OPEC's acting secretary-general, Adnan Shihab-Eldin, is quoted in some press reports as predicting oil will trade between $50 to $60 a barrel for the next two years before rising to $80 a barrel.

Even though gasoline prices are high, so are inventories. The cold and snowy winter in the Northeast meant that refiners were busy making home heating oil. As a result of the demand, they also produced more gasoline from the same barrel of oil.

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