Gas Prices Up Sharply Ahead of Peak Season

By Steven Mufson
Washington Post Staff Writer
Tuesday, April 4, 2006

Gasoline prices have surged by 36 cents a gallon in the Washington area over the past month, according to the AAA auto club, with the beginning of the peak driving season less than two months away.

The average price in the metropolitan area reached $2.63 a gallon for regular unleaded gasoline yesterday, up a penny from the day before and a nickel more than the national average. The price is up from $2.27 a gallon a month earlier and $2.17 a year ago.

With political tensions propping up crude oil prices and oil demand running strong in the United States and rising in China, gasoline prices could remain at these levels for the foreseeable future.

High gasoline prices have had only a modest impact on the driving habits of American motorists, who have done relatively little to moderate their gasoline consumption. Ever since oil prices soared in September after Hurricane Katrina, gasoline consumption has been within 1.5 percent of the previous year -- some months lower, some months higher, according to figures from the U.S. Energy Information Administration. Gasoline deliveries in January, barely lower than a year earlier, ran 13.3 percent higher than January 1999, when crude oil prices were a fraction of current levels.

"People are wealthier, they've been enticed into buying homes further from work, and the auto industry has been enticing them into buying very inefficient vehicles," said Philip K. Verleger, an oil consultant. He estimates that it takes a 20 percent increase in price to trim consumption by 1 percent today while a 10 percent price increase in the 1970s would have an identical effect.

Nonetheless, angry motorists are already sending e-mails to AAA complaining about the higher prices. One accused local gasoline stations of "price gouging" and claimed prices go up twice a day at some places.

John Felmy, chief economist of the American Petroleum Institute, blamed the increase on higher crude oil prices, shutdowns in U.S. refineries for maintenance deferred since Katrina, and regulations mandating that oil refiners remove an environmentally harmful additive and substitute more expensive ethanol.

But some consumers remain unconvinced. "These are things that don't explain the hike," said Dawn Van Dyke, a spokeswoman for AAA Mid-Atlantic. "It's not enough. It's too much of a hike."

The price increases come as major oil companies are reaping record profits. Last month, the Senate Judiciary Committee held a hearing at which senior executives from some of the largest firms were grilled by lawmakers about whether a spate of mergers among major companies had resulted in price gouging.

Crude oil prices yesterday briefly climbed to their highest levels since Feb. 1, pushed upward by unrest that has curtailed output in Nigeria by about half a million barrels a day, disputes between Venezuela and oil companies over contract terms, and a rise in investments in commodity funds, oil industry experts said. U.S. crude oil ended the day 11 cents higher, at $66.74 a barrel.

Officials from the Organization of Petroleum Exporting Countries and its members tried to moderate the increases, suggesting that there wasn't any plan to cut output. Qatari Oil Minister Abdullah al-Attiyah told Reuters on Sunday that "We are doing all that we can do . . . to stabilize the oil market."

But U.S. experts say key factors are out of OPEC's hands. To believe otherwise "assumes that crude prices lead [petroleum] product prices and not the other way around," Verleger said. "And since the beginning of 2004, product prices have been pulling up crude prices."

Many oil experts had predicted higher gasoline prices around this time because of new rules on gasoline additives. The Clean Air Act of 1990 required the oil industry to use additives to oxygenate gasoline, which reduces tailpipe emissions. Refiners largely turned to methyl tertiary-butyl ether (MTBE), which in small quantities enhances octane and reduces engine knocking. MTBE made up about 2.8 percent of the 140 billion gallons of gasoline used last year, Felmy said.

But MTBE, a volatile, flammable and colorless liquid, has been found to have contaminated groundwater in many places. Last year's energy bill removed the federal requirement for an oxygenate in gasoline, but supporters of ethanol persuaded lawmakers to insert a requirement that refiners use more ethanol. Ethanol supplies are modest, however, and the price runs about $2.50 a gallon, Felmy said, even though ethanol has only 70 percent of the energy value of gasoline.

Trilby Lundberg, editor of the gasoline monitor Lundberg Survey, said, "We want the cleanest gasoline in the world and we have it: the cleanest and most costly gas in the world." Only higher taxes in other countries prevent U.S. gasoline prices from being the highest in the world, she added. Verleger said that it wasn't only a matter of environmental concerns but also a question of competing interests. "The ag interests wanted to push more ethanol down people's throats," he said.

Felmy said prices have also gone up because of refinery shutdowns, partly for maintenance and partly to meet tougher emissions standards. After Hurricane Katrina, he said, "if you had a refinery that could keep running in the fall, you kept it running." Now, he said, companies are doing deferred maintenance. A year ago, U.S. refineries were running at 92.3 percent of capacity. They are currently running at about 87 percent, Felmy said. Nonetheless, some observers noted that inventories of both crude oil and refined petroleum products have risen since the beginning of the year, raising suspicions that major oil companies are pushing up prices as much as possible.

"There is generally a small increase in price this time of year as refinery capacity is limited while switching to summer-grade fuels, but the recent increases have been atypical for this changeover," AAA's Van Dyke said. "While we recognize current events and we expected summer demand increases to affect the overall price of gasoline, it isn't as dire as the price jump of the last month would have you believe. Gasoline prices have been trending upward at a steep rate that seems beyond justification."

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