Prices suddenly rise at the pump as refiners face spot shortages

Oil firms mount a gas airlift to help drivers in the Midwest, where prices hit $2 a gallon.

Is it the equivalent of the mercy flights of the Berlin airlift, or the greed of the great Gold Rush?

A sudden spike in gasoline prices in the Midwest is stimulating creative attempts by the nation's refiners to get gasoline there - and the potential for profit is high.

• Marathon Ashland Petroleum is flying truckers from Florida and Georgia to the Midwest so they can ride through the night to get tankers to Chicago.

• ExxonMobil has chartered extra petroleum barges for the 15-day trip from the Gulf of Mexico up the Mississippi to gas stations in Chicago and Milwaukee, where prices have hit as high as $2.07 a gallon.

• Every inch of pipeline from the bayous of Louisiana to the Upper Peninsula of Michigan is booked every minute of the day with barrels and barrels of gasoline.

Yes, everyone, including the Environmental Protection Agency - which is easing standards - is trying to help. But despite these efforts, Americans who are driving this last big weekend of the summer will find higher gas prices in many parts of the US.

"It's going to continue to be a very tight gasoline market through mid-September with rising prices," says Jacob Bournazian, an economist with the Energy Information Administration in Washington.

But the price increases - which have amounted to as much as 40 cents in the Midwest over the past month - should begin to moderate. With summer vacations over, demand in the Midwest will begin to moderate from 2 million barrels of gasoline a day to 1.7 or 1.8 million barrels per day. And more gasoline should be coming to the markets.

"Prices could have already peaked," says Jay Saunders, an energy analyst at Deutsche Banc Alex. Brown in Baltimore.

One problem: fire damage

Hardly anyone, however, expects prices in the Midwest to fall much. That's in large part because of a fire at Citgo's Lemont, Ill., refinery Aug. 14, which caused considerable damage to a key segment of the production process. Now, the company estimates it will take 20 to 24 weeks to get the refinery operating normally. That refinery normally supplies about 8 percent of the gasoline used in the Chicago area.

On Tuesday, the EPA gave Citgo some flexibility by waiving the requirement to produce a summer blend of gasoline that causes less pollution.

"It will help to eliminate some concerns, but there will still be short supply for some time," says Bob Slaughter, general counsel for the National Petrochemical & Refiners Association in Washington.

The refinery fire and subsequent price hikes have caught the attention of Midwest politicians. Last week, Rep. Thomas Barrett (D) of Wisconsin asked Energy Secretary Spencer Abraham to become more involved by providing more information on the supply-and-demand situation, to dampen market speculation. Speculators have helped to drive prices higher.

Why fly when you can drive?

Even before the fire, prices were rising, says Mr. Bournazian. This price hike apparently was caused by strong demand, which lowered inventories. "The theory is that people looking at airline loads decided to drive the family car instead of flying," says Adam Sieminski, a global energy strategist at Deutsche Banc Alex. Brown.

The higher prices in the Midwest have had a modest ripple effect in other parts of the country. Normally, the region imports about 25 percent of its production from the Gulf Coast. As that total has increased, gasoline prices from Texas to Florida have also been driven up. "It's an interconnected system with a finite amount of product," says Mr. Slaughter.

With all the emphasis on producing gasoline, some analysts are concerned that the refiners might be late in producing home-heating oil. This is the time of year when oil companies start to build up inventories for the winter. In recent years, the industry has come under criticism for entering the home heating season with below-normal supplies.

But Mr. Saunders indicates that the companies appear to have the inventory problem under control, although it's still early to tell. He says, "It looks like there is only modest price strength in home-heating oil going into October."

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