With gas costly, drivers finally cut back

For the first time since 1980, when long lines sprouted at gasoline stations, Americans are beginning to cut down on their driving.

The slight decline in total miles driven – apparent first in December – may indicate that the twin forces of high gasoline prices and a struggling economy are starting to affect the US lifestyle. Surveys find that Americans now consider gasoline prices a "financial hardship."

If Americans are still balking at prices at the pump by Memorial Day, the effect on the economy may be wider – ranging from how people take vacations to how many trips to the mall they make.

"If you don't have a job, these prices are doubly hard," says Michael Swanson, an economist with Wells Fargo Economics in Minneapolis.

American's reluctance to pay an average of $3.28 a gallon for fuel has already had an effect: Gasoline inventories are high. If it weren't for the high stocks, gasoline prices would be even higher, energy analysts say.

Still, by Memorial Day, gasoline could cost another 25 cents a gallon, energy analysts estimate. By the time refiners switch over to the summer blend of gasoline, the price could rise again.

"My feeling is the price will approach $3.50 a gallon as gasoline inventories come down and people start driving more," says Sander Cohan, an energy analyst at Energy Security Analysis Inc. in Wakefield, Mass. "This summer, it's feasible for gasoline to hit $4 a gallon."

If gasoline does hit $4 a gallon, it might be a "psychological break point," says Dennis Jacobe, chief economist at the Gallup Organization in Washington. "It doesn't just start to affect you financially, but you also start to think how much it costs to go someplace," he says. "People cut back on their recreational use of vehicles and all kinds of travel."

AAA, the national drivers club, has found that when gasoline prices are high, Americans try to compensate. "They travel closer to home. They stay at more economical hotels. They eat out at fast-food restaurants and try to find the shortest route to a destination," says Troy Green, a spokesman in Washington.

In February, a survey by the National Association of Convenience Stores found that 29 percent of the respondents said that high gasoline prices had forced them to change their spending patterns. Forty percent said they tended to drive somewhat less as result of high gasoline prices.

One key to whether Americans will react negatively to gasoline prices is how quickly pump prices rise, Mr. Jacobe says. It is easier for consumers to adjust to a gradual rise. "If we see prices rising fast each day, it scares people," he says.

Energy analysts are concerned that the dynamics are in place for a relatively quick rise this spring. With gasoline inventories high and demand slow, refiners are pulling back on the production of gasoline, says Mr. Cohan. "The refiners are losing money with oil at these levels, so they are cutting back," he says.

By one estimate, gasoline prices could rise 18 cents a gallon just to catch up to the rise in oil prices. Year to date, oil has risen 94 cents a gallon, compared with a rise of 76 cents a gallon for gasoline over the same time period, estimates John Felmy, chief economist for the American Petroleum Institute (API).

Another potential factor in determining gasoline prices: political pressures on oil companies. On Tuesday, the chief executives of the top five oil companies were to testify about energy prices before the House Select Committee on Energy Independence and Global Warming.

On Monday, the committee chairman, Rep. Edward Markey (D) of Massachusetts, noted that gasoline prices, according to AAA, had hit a record high of $3.28 a gallon. "This new gas price record is a perfect example of why we need these oil companies to go on the record with the American people to discuss our dangerous dependence on oil," he said in a statement.

On Monday, API retorted that rising global demand for oil, combined with the falling value of the dollar and a lack of access to potential new oil supplies, is behind the higher prices.

The last time that Americans did cut down on their driving in response to high prices, around 1980, they reduced their driving for 14 months. "We're starting to see a similar pattern emerge," Mr. Swanson says. "This could be a huge washout this summer and for a couple of years."

But Mr. Green is not so sure. "Americans love driving their cars, and for other people it's a necessity," he says. "They will make it up by cutting back in other areas if they have to."