Americans brace for higher summer gas prices

Gasoline prices have never been higher this time of the year in the U.S.

At $3.53 US a gallon, prices are already up 25 cents since Jan. 1. And experts say they could reach a record $4.25 a gallon by late April.

(The $3.53 national average U.S. gas price converts to $3.50 Canadian per gallon, or 92.4 cents per litre.)

"You're going to see a lot more staycations this year," says Michael Lynch, president of Strategic Energy & Economic Research, referring to people staying at home on their vacations. "When the price gets anywhere near $4, you really see people react."

Already, W. Howard Coudle, a retired machinist from Crestwood, Missouri, has seen his monthly gasoline bill rise to $80 US from about $60 in December. The closest service station is selling regular for $3.39 US per gallon, the highest he's ever seen.

"I guess we're going to have to drive less, consolidate all our errands into one trip," Coudle says. "It's just oppressive."

The surge in gas prices follows an increase in the price of oil.

Gas hikes could harm recovery

Oil around the world is priced differently. Brent crude from the North Sea is a proxy for the foreign oil that's imported by U.S. refineries and turned into gasoline and other fuels. Its price has risen 11 per cent so far this year, to around $119 a barrel, because of tensions with Iran, a cold snap in Europe and rising demand from developing nations. West Texas Intermediate, used to price oil produced in the U.S., is upfour per cent to around $103 a barrel. That's 19 per cent higher than a year earlier.

Higher gas prices could hurt consumer spending and curtail the recent improvement in the U.S. economy.

A 25-cent jump in gasoline prices, if sustained over a year, would cost the economy about $35 billion US. That's only 0.2 per cent of the total U.S. economy, but economists say it's a meaningful amount, especially at a time when growth is only so-so. The economy grew 2.8 per cent in the fourth quarter, a rate considered modest following a recession.

High oil and gas prices now set the stage for even sharper increases at the pump because gas typically rises in March and April.

Every spring, refiners suspend operations to switch the type of gasoline they make. Supplies of wintertime gas are sold off before March, when refineries need to start making a new formula of gasoline that's required in the summer.

That can mean less supply for service stations, resulting in higher gas prices. And summertime gasoline is more expensive to make. The government mandates that it contain less butane and other cheap organic compounds because they contribute to the formation of ground-level ozone, a primary constituent in smog. That means more oil, a costlier component, is needed to produce each gallon.

The Oil Price Information Service predicts that gasoline could peak at $4.25 a gallon by the end of April. That would top the record of $4.11 in July 2008.

The national average for gasoline began the year at $3.28 a gallon. The average price for February so far is $3.49 a gallon. That's up from $3.17 a gallon last February, a record at the time. Back in 2007, before the recession hit, the average for February was $2.25 a gallon.

Prices are higher on the East and West Coasts, where gasoline has risen above $3.70 in Connecticut, New York, Washington D.C. and California. This isn't unusual states on the coasts charge some of the nation's highest gas taxes.

High gas prices put a strain on many people's budgets.

Americans spent 8.4 per cent of their household income on gasoline last year when gas averaged an all-time high of $3.51 a gallon. That's double the percentage a decade ago. They could pay even more this year, even though demand is the lowest in 11 years as people drive fewer miles in more efficient cars, says Tom Kloza, chief oil analyst at OPIS.

Gary Goodman commutes into Manhattan from Edgewater, New Jersey, because gas, tolls and parking make the cost of driving prohibitive.

Goodman, an accountant, commutes by bus. He uses his car mostly for trips to the grocery store or for occasional nights out. He says he has no choice but to eat the higher gas costs. Advertise | AdChoices

"I already drive as little as possible," he says.

Paul Dales, a senior economist at Capital Economics says it would take a bigger shift in the global economy say, a deep recession in Europe or a slowdown in Asia's manufacturing for pump prices to drop noticeably. Either event would slow oil demand, depressing prices.

But experts expect demand to keep rising. World oil demand is expected to increase by another 1.5 percent to 89.25 million barrels a day in 2012, according to the Energy Information Administration.

In the short term, tensions with Iran are feeding fears that oil supplies could be blocked.

The U.S. and Europe are tightening economic sanctions against Iran over what the West believes is Iran's attempt to build a nuclear bomb. World leaders fear Israel may be planning a strike against Iran, the world's third largest oil exporter.

In response, Iran has threatened to withhold its own oil deliveries and to block the Strait of Hormuz, a waterway along its coastline through which one-fifth of the world's oil flows.

On Friday, an international banking clearinghouse crucial to Iran's oil sales said it is prepared to discontinue services to Iranian financial institutions being targeted by the EU and U.S. sanctions. That could ratchet up the pressure on Iran, but also send oil prices soaring.

The price of Brent crude fell 53 cents on Friday to $119.58 US. WTI gained 93 cents to $103.24 US.

Gas prices are already an issue in the presidential campaign. Republican candidate Newt Gingrich spoke several times this week about opening up more federal land to oil and gas drilling as a path toward U.S. energy independence and lower pump prices.

"Our goals should be to get gasoline to $2.50 US or less so that working families can actually get to work and retired families can travel," Gingrich said at a campaign event in Los Angeles Thursday.