High Gas Prices Could Slow Recovery
By CLIFFORD KRAUSS
Published: June 8, 2009
HOUSTON — After just a few months of relief at the pump, cheap gasoline is disappearing.
Gas prices have risen 41 days in a row, to a national average of almost $2.62 a gallon. That is a sharp increase from the low of $1.62 a gallon that prevailed at the end of last year.
Refinery problems are producing especially high prices in the Midwest, a region that was already reeling from the economic crisis. Michigan, the state with the highest unemployment rate, at 12.9 percent, is now paying the highest gasoline prices, averaging $2.93 a gallon.
The national jump in prices, far larger than the normal seasonal increase, is pulling billions of dollars from the pockets of drivers. It threatens to curtail a modest recovery in consumer spending on items like apparel and electronics.
After increasing 62 percent since December, the price of gasoline is actually lagging behind the increase in the price of oil, which has doubled in the same period, to more than $68 in recent days. Analysts say the increase is being driven by investor expectations of an economic recovery, the recent fall of the dollar against other currencies and, to a lesser extent, the success of oil-exporting countries in curtailing supplies.
Whatever the reasons, Dawn Cunningham, a sales representative from Elk Grove Village, Ill., was not happy as she spent $45 the other day to fill the tank of her Honda Pilot sport utility vehicle. “My husband and I both took pay cuts recently, and now the rising price of gas is taking even more out of our pockets,” she said.
Prices remain well below those of last summer, when the national average for regular gasoline soared above $4, but economists say the recent gains are a growing economic problem and may presage a rise in the overall inflation rate.
“This hits everyone,” said Robert J. Shiller, an economist at Yale. “It has the potential to affect your confidence.” He said that the recent rise in gasoline prices could effectively offset the new $400 to $800 payroll tax cut most employees are receiving this year as part of the Obama administration’s effort to stimulate the economy.
Consumers last summer were pulling $1.5 billion a day from their wallets to fuel their vehicles. By January, as oil prices collapsed, they were spending only $600 million a day. But now they are back to daily spending of around $1 billion, Tom Kloza, chief oil analyst at the Oil Price Information Service, said.
The price increase mystifies some analysts, who say that oil demand remains weak. According to the International Energy Agency, worldwide demand is down 2.6 million barrels a day from last year, mostly because of declines in driving and slower economic activity in the United States and other industrialized countries. Oil inventories are high.
“I’m scratching my head,” said Adam Sieminski, chief energy economist at Deutsche Bank, who attributes oil’s rise to an influx of investment dollars. “Right now, the sense is the economy is on a path toward improvement, and there is a lot of cash sitting on the sidelines. So hedge funds, sovereign funds, pension funds are investing in futures and oil stocks and commodity indexes.”
Glenn Darden, chief executive of Quicksilver Resources, an independent oil and natural gas producer in Fort Worth, predicted that oil prices would keep rising. “We were below the cost of drilling and production costs, so that situation could not last,” he said. “Oil being at $70 or $80 or $100 a barrel is where it’s going.”
Crude oil settled Monday in New York trading at $68.09 a barrel.
Because of the economic downturn, petroleum refiners around the country slowed gasoline production at the end of last year, and more recently they took extra time to complete the switch from winter to summer fuel blends.
Several refineries in the Midwest had temporary maintenance delays and problems, including at the large BP refinery in Whiting, Ind., which has had to retool its operations to refine fuels from Canadian oil sands.
“You are entering the highest demand season of the year with tight supply, and that supply may not catch up with demand until the fall,” said Lewis Adam, president of ADMO Energy, a consulting company.
The increase since the beginning of the year has been especially brisk in Illinois, Indiana, Ohio and Michigan, states already hit hard by the decline in the automobile industry and slumping home prices.
“Every penny counts,” said Mayor Valerie Knol of Farmington, Mich., who said that people in her area typically drive long distances for work and do not have ready access to mass transit. She added that the extra money people were spending on gas was money they would otherwise spend going out or buying goods.
Molly Maloney, 17, winced the other day as she pumped $40 worth of gas into her Toyota Camry at a station in Westlake, Ohio, that was selling its regular blend for $2.75 a gallon. She is looking for a job in a tight economy, and the high gas prices are crimping her search.
“I’m just blindly applying to any place that’s close to my house, so I won’t have to drive very far,” she said. “It’s just crazy.”
Experts who follow the auto industry see a silver lining of sorts in the rising prices. The government, which recently bailed out two of the three Detroit carmakers, is pressing the companies to build smaller, more fuel-efficient cars.
“The manufacturers need high gas prices for people to accept those cars,” said Maryann Keller, an automotive consultant. “Gasoline prices motivate behavior.”
Karen Ann Cullotta contributed reporting from Chicago, and Christopher Maag from Westlake, Ohio.
