Not summer yet, but gasoline prices are high and rising

Concerns in the oil market and increased refining costs send gas over $2.55 a gallon.

Gasoline at three bucks a gallon.

It's not there yet. But even before the summer driving season, the price of gasoline is on the rise - now about 35 cents a gallon higher than last April, and less than 50 cents from topping the $3-a-gallon mark nationally.

As usual, the price of oil is a major factor. Thursday morning, a barrel of crude oil was above $67 - less than $3 from the record of $69.91 set after hurricane Katrina. But this time, other factors are also coming into play, including a shift in the refined-products market that has driven up the price of ethanol.

In some parts of the United States, service station owners are scrambling just to keep their tanks full.

"Usually you can set your watch on that seasonal run-up in gasoline prices, but we are ahead of schedule," says Mantill Williams, spokesman for AAA in Washington. "The record high price was $3.05 set last spring, and we are on pace to catch that."

The higher prices will hit Americans at a time when they take to the roads a lot - spring break and Easter. According to AAA, a motorist driving a 2005 Ford Taurus from New York to Orlando, Fla., and back will pay $43.32 more than last year.

"Demand is up 2 percent globally and about 1 percent here," says Mr. Williams. "All it takes is one little minor hiccup for prices to run up."

In the crude-oil markets, energy traders remain concerned over the standoff with Iran and its nuclear program. In the past week, Iran has said it's also tested several missiles as well as new high-speed torpedoes capable of sinking Western submarines and ships.

"Do they have the technology to do it?" asks Mike Fitzpatrick, an oil trader at FIMAT USA, a commodity trading house, in New York. "Who knows, but it's a symbol of their intransigence."

At the same time, in Nigeria, another large oil producer, Royal Dutch Shell, shut down some of its production until tensions with local groups calm down. And in Venezuela, the state has been putting pressure on major foreign oil companies.

How high could oil go? Some estimates have put the next peak at $75 a barrel. But Mr. Fitzpatrick says it's hard to apply traditional analysis to the oil markets because of the political uncertainty surrounding it. "Oil is not just a commodity anymore," he explains.

In the refined-products market, the problem this year is the switch-over from methyl tertiary butyl ether (MTBE), a blending component that helps gasoline burn cleanly, to ethanol. The Environmental Protection Agency has mandated the phaseout of MTBE since it has been found in drinking water.

"The expansion of the ethanol industry did not anticipate this attempted mass exodus from MTBE," says Tancred Lidderdale, an analyst with the Energy Information Administration in Washington.

In fact, the surge in demand for ethanol has sent the price sharply higher. "If ethanol were in abundant supply, the price would not be any higher than gasoline, but it is higher than gasoline," says Mark Routt, an energy analyst at Energy Security Analysis Inc. in Wakefield, Mass. "It's not only higher, but we have an import tariff of 54 cents a gallon and an ad valorem tax of 2.5 percent on top of that."

The ethanol industry says it shouldn't be blamed for the run-up in prices this spring. "Ethanol makes up only 10 percent of a gallon of gasoline," says Bob Dinneen, CEO of the Renewable Fuels Association in Washington. "If gasoline prices are up 36 cents, then ethanol would only make up 3.6 cents of that. And 85 percent of users have long-term contracts that are significantly below the spot-market prices."

However, some buyers of gasoline say the switch-over to ethanol is expensive and inefficient. Bill Douglass, CEO of Douglass Distributing Co. in Sherman, Texas, says his normal supplier has shut down to convert to ethanol.

"They have to empty their tanks, go in and clean them, and then haul in ethanol from Kansas," he explains. "We're running all over the place to find a replacement for MTBE."

Mr. Douglass, who is also the past chairman of the National Association of Convenience Stores, says the wholesale price of ethanol is now up to $2.65 a gallon, about what he now pays for gasoline. "From what I've heard, it costs from $1 a gallon to $1.25 a gallon to make ethanol, and that doesn't take into account a 54-cent-a-gallon tax credit," he says.

Despite the rising price of fuel, there are no signs that Americans are driving less. In the first quarter of the year, gasoline consumption rose 1.05 percent over the first quarter of 2005.

"Even with high prices, it's not cutting into Americans' driving," says Geoff Sundstrom, a AAA spokesman in Heathrow, Fla. "If we're adding jobs, GDP is rising, incomes are at least holding steady, people feel comfortable about taking car trips."

Douglass's company supplies fuel to 165 stores plus 13 of his own Lone Star Food Stores. With the wholesale price of gasoline now close to $2.67 a gallon, it won't be long before he starts retailing fuel for $3 a gallon, he says, adding, "Even hurricane Katrina didn't do that."

Material from wire services was used in this report.

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