U.S. demand for gas is driving prices higher

Last summer's hurricanes continue to affect prices.
KNIGHT RIDDER NEWSPAPERS
WASHINGTON -- Gasoline prices have reached $3 a gallon in some parts of the nation, and crude oil is hovering close to last summer's record high. With peak summer-driving season and hurricane season approaching, experts fear that today's high prices might look like a bargain later this year.
The culprits are geopolitics, changes in the way refineries produce gasoline, lagging oil production in the Gulf of Mexico and -- most of all -- us, American consumers.
Despite higher prices for crude oil and gasoline, U.S. demand for fuel continues to grow. It was up by more than a full percentage point in March and is expected to climb still more when the peak-driving season begins in May.
That will keep gas prices between $2.50 and $3 a gallon -- if there are no major disruptions in supply, experts said. If anything goes wrong with the weather or geopolitics, watch out. "We may look back at the day fondly when we paid $3 a gallon," said Phil Flynn, a vice president and energy expert at Alaron Trading Corp. in Chicago.
Prices rising
Gasoline prices have been rising again after dropping from last summer's record of $3.05 on average for a gallon of regular unleaded. The American Automobile Association said Friday that that price now stood at $2.60, 27 cents higher than a month ago and 35 cents higher than April 2005.
Crude oil prices flirted with $69 a barrel this week on the New York Mercantile Exchange, approaching the all-time high of $70.85 last Aug. 30 immediately after Hurricane Katrina.
What moved prices this week was a report by the Energy Information Administration, the statistical arm of the Energy Department, that showed a larger-than-expected draw-down of U.S. gasoline stocks. That spooked energy traders because it suggested either that refiners can't keep pace with the demand for gas or companies that fear shortages are hoarding.
Driving up price
But an unusual confluence of events is driving the large difference between last year's price and this year's.
Chief among them is new environmental concern over a common additive known as methyl tertiary butyl ether. MTBE helps refiners comply with Clean Air Act requirements by making gasoline burn more cleanly and emit fewer toxic byproducts.
Some states -- most notably California, New York and Connecticut -- have banned MTBE, however, because it contaminates groundwater, and on May 5 the federal government no longer will require refined gasoline to contain at least 2 percent by weight of additives such as MTBE.
Many refiners, unable to sell in some states and fearing future environmental claims in others, are no longer putting MTBE in their gasoline, which could reduce the volume of the nation's fuel supply by about 1.6 percent, a large amount in a tight market.
Last summer's hurricanes remain a problem. Refineries operated by Murphy Oil and ConocoPhillips in Louisiana and British Petroleum's refinery at Texas City, Texas, are still inoperable or only partly running. Together the three refineries accounted for almost 4.5 percent of the nation's refining capacity, Slaughter said.