Gas prices hit $3 a gallon, highest in 27 months. Will they go higher?

Now at an average price of $3 a gallon, gasoline could cost at least $3.50 a gallon by spring. Rising gas prices go hand in hand with higher oil prices, driven up by outlook for a stronger economy.

Paul Sakuma/AP
High gas prices on display at a Shell gas station in San Francisco on Dec. 6. Americans are getting a sour holiday surprise at the gas pump, where prices are at the highest they've been in over two years.

The average pump price for a gallon of gasoline rose to $3 on Wednesday, according to AAA, Wright Express, and Oil Price Information Service. That's more than 13 cents higher than a month ago and 41 cents above a year ago.

The last time gasoline averaged $3 a gallon was in October 2008, as prices drifted down from record highs above $4 a gallon in the summer of that year.

Gasoline prices have been rising steadily with oil prices for the past month, and many analysts say that trend will continue, with gas stations across the country charging about $3.50 a gallon or more by spring.

Oil prices climbed past $90 a barrel on Wednesday as the government reported a drop in the nation's crude supplies. Benchmark oil rose 66 cents to settle at $90.48 on the New York Mercantile Exchange.

In its weekly petroleum report, the Energy Department's (DOE) Energy Information Administration said crude supplies dropped by 5.3 million barrels last week from the week before. That's more than twice the decline expected by analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos. EIA said gasoline supplies grew by more than 2 million barrels.

Analysts said the drop appeared to be due to year-end inventory adjustments rather than significantly higher demand or a shortage of imports.

"Traders should not be fooled by a big draw from today's DOE data," said Stephen Schork, editor of the Schork Report newsletter. While shrinking oil inventories could help support higher prices, he noted that total supplies remain more than 10 percent above the 2004-2008 period.

Energy consultants Cameron Hanover said oil prices have been climbing and pulling up gasoline prices because investors are optimistic about the economy. Recent developments such as the extension of tax cuts and the Fed's bond-buying stimulus program have convinced many that the economy will improve and, with it, demand for oil and gasoline.

The economic news Wednesday did not throw much cold water on that. The Commerce Department said the gross domestic product rose at an annual rate of 2.6 percent between July and September, slightly below what analysts expected but an improvement from an earlier estimate. And the National Association of Realtors said sales of previously occupied homes rose almost 6 percent in November.

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