Record gas prices strike by surprise

Some fear rise will continue into summer

others see blip

May 23, 2007|By Tricia Bishop | Tricia Bishop,SUN REPORTER

When the nation's average price of regular gasoline reached a record high in September 2005, the cause was pretty clear: Hurricane Katrina had just ravaged oil refineries.

But explaining this week's record of $3.22 per gallon is more complicated because the rise resulted from a combination of factors. They include increased demand, lower inventory, refinery shutdowns in the United States and abroad, and the rising price of crude oil, which has gone from about $50 per barrel at the start of the year to $64.97 per barrel yesterday.

"Unlike Katrina, which was a massive event ... this has just sort of been a lot of chunks that just sort of added up," said Douglas MacIntyre, a senior analyst with the U.S. Energy Information Administration.

Prices typically rise during the spring and summer months, as families gear up for driving vacations and take their lawn mowers and motorboats out of winter hibernation. But this year's pre-Memorial Day spike, an early rise by most accounts, has caught consumers off guard and surprised energy analysts.

Some worry the increase will continue throughout the summer, eventually nearing the $4 mark, particularly if a rough hurricane season appears or geopolitical tensions grow. Others believe it's a blip that will pass.

Energy experts are also split on the effect prices are having on U.S. gas usage. The Energy Department shows demand rising for the first few months of this year, though Transportation Department statistics say Americans are driving less.

The current $3.218 U.S. average per gallon is about 33 cents above the mean price a year ago and 15 cents higher than the post-Katrina peak, which reached about $3.07 per gallon. But it's still below the $3.29, adjusted to today's dollars for inflation, that consumers paid per gallon in March 1981 after the Iraq-Iran war had limited oil supplies.

Oil refiners have honed their technology to get more gasoline out of every barrel of crude oil and streamlined their processes to improve production. But recent refinery troubles have led to less available gasoline and higher costs this year.

Nigeria, known for exporting oil, has instead had to import its own as rebels shut down a third of the country's production this month. In South Africa, a Chevron Corp. refinery is operating below capacity - and will continue to do so for a while, according to the company - after units were shut down for seven weeks of maintenance.

And yesterday, London-based BP said it will cease production of 100,000 barrels a day of Alaskan oil for several days because of a pipeline leak. Two other major BP refineries - one in Whiting, Ind., and the other in Texas City, Texas, where 15 people lost their lives in an explosion in 2005 - already have "substantially lower" production levels this month than normal, according to the Energy Information Administration.

Some of the slowdown in U.S. refining efforts can be attributed to new clean air laws that have meant some facilities have shut down to bring their operations up to code. Other units have been forced to close to take care of routine maintenance, which had been put on hold after Hurricane Katrina in an effort to take advantage of an increased need for refining.

"They were keeping the refineries running more than they usually did post-Katrina because there was money to be made," said Thomas Firey, a senior fellow at the Maryland Public Policy Institute, which promotes policies based on free enterprise and limited government. "Now finally, it's time to catch up."

The Energy Department estimates that gas inventory, usually buoyed this time of year through importing, has dropped 14 percent since February and is down about 7.5 percent overall from its five-year average, stimulating higher prices.

In Maryland, the average price of a gallon of regular gas is about $3.15, with prices ranging from $2.73 on the Eastern Shore to $3.44 in the Washington suburbs, according to Baltimore prices average about $3.11 per gallon and range from $2.89 in Essex to $3.29 in Catonsville.

Governors, including Democrat Martin O'Malley, have reacted by calling for an inquiry into pricing. In a bipartisan letter sent to Congress this week, 21 state leaders noted that gas is a "basic need" and shouldn't be subject to supply-and-demand economics as other commodities are.

Earlier this month, the Senate Commerce Committee passed a bill introduced by Sen. Maria Cantwell, a Washington Democrat, that makes gas price gouging a federal crime with civil and criminal penalties.

"We need better consumer protections on the books. Gas prices and oil company profits are both at record levels, and consumers are left with no way of knowing whether they're being taken for a ride," Cantwell said in a statement.

Congressional hearings were held yesterday on a House version of the bill.

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