Gasoline price spike sets records

Think tank calls for U.S. intervention

The Plain Dealer
May 23, 2007
By John Funk

The spring spike in U.S. gasoline prices set new records this week, reaching an average price per gallon of $3.22, with some stations locally hitting $3.50.

That beats the old U.S. high set in March 1981 when prices averaged $1.41 for the month -- $3.21 in today`s dollars.

And here`s another record: At current prices, Americans are spending about $1.25 billion per day on gasoline, said Tom Kloza, senior analyst with the Oil Price Information Service.

That`s money that would likely have been spent elsewhere.

"As recently as early February, this figure was barely above $800 million," said Kloza.

But he added a crumb of hope, reporting that wholesale gasoline markets around the nation unexpectedly dropped by 10 cents to 20 cents a gallon Tuesday afternoon.

"There was no single factor to account for the huge drop," he said, "although many market watchers sense it was an action long overdue, given that gasoline had been trading at huge margins versus crude oil."

Kloza has said for weeks that demand was slowing, based on his surveys of wholesale and retail marketers.

But the U.S. Department of Energy has maintained that Americans are using 2 percent more gasoline than they did a year ago, even as prices rise.

That has made many analysts wonder how families are affording the fuel.

Families with household incomes in the lower 25 percent are spending about 13 percent of their take-home pay on gasoline, said Christian Weller, a senior fellow at the Center for American Progress.

The independent think tank will today release a study calling for government intervention in a market that it says is more volatile than the stock market.

The swing of gas prices since 2001 - up and down - has paralyzed even middle-class consumers, said Weller. That`s because it`s difficult to know, for example, whether spending the extra money for a highly efficient hybrid car would be worth it.

 But Ronald Planting, an economist with the American Petroleum Institute, said the high prices aren`t as onerous as the price spikes of 1981. Real disposable personal income is much higher now than it was then, he said - people have more leeway in their spending.

A Texas analyst, Henry Groppe, says prices would have to rise to about $5 per gallon before Americans with an average income today would significantly cut back. That`s partly because of the income growth, he said.

"But what really counts is the impact of these prices on lower income people," Groppe said. ". . . If you can afford an SUV, gasoline prices will not eat into your discretionary income."

The price run-up has so far added only a few cents per mile to the average total cost of operating a car, said James Halloran, energy analyst with National City Private Client Group in Cleveland. "People don`t cut back because they can`t cut back," he said. "The attitude of many is to drive through the high prices because they have been volatile. My guess is prices would have to stay up for nine months to a year" before they would have a real impact on use.

At this point, the impact on the overall economy has been minimal, he said. "People are taking whatever disposable income they have and using it to continue their lifestyle and to drive their cars."

Meanwhile, the Consumer Federation of America says the federal government has to act.

High prices are said to be caused by production failing to keep up with demand - production that`s low because refineries stayed down longer than usual for maintenance and accidents.

Mark Cooper, an analyst with the consumer watchdog group, says the country needs more refinery capacity. "Here is an industry that can`t do spring cleaning without disrupting the market," he said.

Cooper says it`s the government`s fault for allowing the industry to consolidate over the last decade. His group wants federal mandates for more refinery capacity, built either by industry or the government itself; stronger antitrust laws; and higher mileage standards for American automakers.

"It took 10 years to get into this situation," he said. "It will take 10 years to get out of it." 

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