Oil prices pinch other spending

The price of gasoline has begun a springtime surge that experts believe will push it to a national average of $2.50 a gallon by Memorial Day.

At that level, many Americans will find it costs about $65 - or more - to tank up the Sequoia or Suburban. In California, which usually has some of the highest prices in the nation, forget about expensive self-indulgences because gasoline could average close to $3 a gallon.

If prices were to remain at these higher levels by the summer driving season, it would mean Americans would spend $5 billion more a month than they did last summer on gasoline. Economists estimate this will reduce economic activity as Americans have less money to buy ice cream or go to the movies. In fact, consumer polls now indicate confidence in the economy is eroding as fast as gasoline prices are rising.

"Consumers are now responding differently this year than they did last year when prices were high. They are fundamentally changing their spending," says Mark Zandi, chief economist at Economy.com. "I think we'll begin to see the effects on spending in the second quarter."

Last week, an analysis by the investment banking firm Goldman Sachs looked at how high gasoline prices would have to go to induce Americans to change their SUV lifestyle. The analysis said, "Super spike may be upon us." If so, it predicted the price of a barrel of oil could reach $135 by 2008. At that point, the analysis concluded that gasoline will average about $4.30 a gallon - a price high enough to "meaningfully reduce consumption" and reduce oil prices.

But this summer will not see any major changes in gasoline consumption, predicts Tancred Lidderdale, an economist with the Energy Information Administration in Washington. "The problem is there is still a continued growth in demand as we have a growing population and an increase in the number of autos driven. At the same time there is a general deterioration in the average [automobile] fuel economy."

This means many Americans will be groaning over the next several weeks as prices tick up. According to GasPriceWatch.com, the national average for regular unleaded gasoline is $2.30 a gallon, up 40 to 50 cents a gallon compared with a year ago. In California, gas prices are now averaging about $2.50 a gallon, compared with $2.10 last April. "We won't see the peak until the Memorial Day weekend," predicts Brad Proctor, founder of the Centerville, Ohio, organization.

Energy experts say the price should continue to rise at the pump because it is still not reflecting the higher prices of a barrel of crude oil. It normally takes several weeks before the higher price of crude - currently about $55.50 a barrel - is reflected in the retail price for gasoline, says Mr. Lidderdale.

At the same time, refiners are beginning to shift over to producing the summer blend of gasoline. This change creates its own set of problems, says Mark Routt of Energy Security Analysis in Wakefield, Mass. For example, in New England, the additive MBTE has been replaced with ethanol for pollution reasons. "You get 2.4 percent worse gas mileage with ethanol," says Mr. Routt, who observes that gasoline prices almost always mini-spike around April 15 when the gasoline stations shift over.

To meet demand, oil companies import gasoline from overseas. This has already started, says Routt, pointing to recent shipments of blending components from Taiwan and India. "Part of the silliness of the story is that our imports must continue higher as our demand continues higher," he says. No new refineries have been built in the US since 1976.

To free up the refinery bottleneck, Mr. Proctor is proposing to end the production of the middle grade of fuel. "It's equal to building one or two new refineries now," he says. "It would release the strain on production."