Price of Gas Hits 23-Year High

$2 a Gallon Seen As 'Sustainable' Norm This Year

Oil and gasoline prices vaulted into record territory this week, pushing pump prices to the front of the election-year political agenda while raising fears that global demand for oil will have consumers paying $2 a gallon or more for gas for the foreseeable future.

The price of a gallon of regular gasoline yesterday hit an average of $1.95 nationally and $1.92 in the Washington area, according to AAA, formerly the American Automobile Association. In dollar terms, those are the highest levels ever, but adjusted for inflation, they are still well below the $3 reached in March 1981. But now the inflation-adjusted prices have exceeded the levels that had been the second-highest, October 1990, when Saddam Hussein's army had rolled into Kuwait.

With demand running high despite the price increases, average national pump prices are likely to hit $2.10 a gallon within weeks, and they'll stay there, said Mark A. Baxter, director of the Maguire Energy Institute at Southern Methodist University in Dallas.

"This is the economic principle of supply and demand driving prices," Baxter said. "I think this price is sustainable."

What sets this surge apart from other spikes is what one analyst called a "witches' brew" of causes, many of which will not resolve themselves.

"Addressing one factor will help a little, but it won't do it all," said Peter Rodgers, a lawyer with Sutherland Asbill & Brennan who represents oil importers.

At the root of the problem was a fundamental miscalculation by OPEC in February that international oil consumption would be dropping this year, said Philip K. Verleger Jr., an oil market economist and senior fellow at the Institute of International Economics. That was when the oil cartel announced a surprise, 4 percent cut in production starting in March. Back then, forecasters were predicting that a barrel of oil would cost $24, not $41, Verleger said.

Instead, as China's economy has boomed and the U.S. economy has recovered, demand has soared, even as supplies have been cut back. International oil demand has risen by 2 million barrels a day over January forecasts, according to the International Energy Agency. And U.S. oil imports have risen strongly, shooting up nearly 135,000 barrels a day last week alone, the Energy Department said last week.

That has depleted reserves significantly. Oil reserves are nearly 6 percent below the five-year average, according to the Energy Department, and gasoline reserves are similarly stretched. The nation's oil refineries are running flat out, at 96 percent of their capacity, and with prices so high, they are keeping as little in reserve as possible.

"Refinery runs are about as high as we've ever seen them," said S. Eugene Edwards, a senior vice president at refinery giant Valero Energy Corp. "Gasoline production is at record highs. And the [profit] margins are so good, we want to keep everything running."