No sticker shock expected at the pump: gasoline prices will rise, but not much above $3

By Deborah Jian Lee, AP
Tuesday, March 9, 2010

Gas price rises seen gentler on consumer wallets

As the economy recovers, energy prices are rising and that is placing extra strain on families’ budgets.

Each spring brings a familiar ritual in gasoline markets — rising prices — and this year won’t be an exception. But motorists aren’t likely to pay much more than $3 a gallon, on average, during the peak summer driving season.

Lingering effects of the recession, such as high unemployment, reduced shipping and limited business travel, are keeping a lid on energy demand in the U.S. And global oil supplies are on the rise. For now, these trends are providing energy markets with enough of a cushion to prevent geopolitical tensions from causing severe price volatility.

On Tuesday, the Energy Department’s statistical arm predicted that oil prices would average $80 a barrel this spring, and rise to about $82 a barrel by the end of the year, influenced by robust growth in China. This is consistent with the agency’s past four monthly outlooks. Last year, oil prices averaged about $62, trading in a range between $33.98 and $82.66.

The average nationwide price for regular gasoline was $2.76 a gallon on Tuesday. Because of the anticipated bump in crude prices, the government estimates that gasoline prices will average $2.84 a gallon this year, up from $2.34 in 2009. It’s enough for families to take notice, economists say.

Gasoline accounts for about 4 percent of the typical family’s budget. But consumers tend to pay the increase at the pump instead of driving less. That leaves less to spend on clothing and other discretionary purchases.

Sung Won Sohn, an economics professor at the Smith School of Business at California State University, lowered his forecast for U.S. economic growth to 3 percent, from 3.2 percent, because of the anticipated rise in energy costs.

“Higher gasoline prices are like a tax that depresses overall consumer spending,” he said.

A recent government report showing that incomes edged up only 0.1 percent — the weakest showing in four months — raised concerns about whether consumers will be able to keep spending at a strong enough pace to support an economic rebound. Consumer spending is closely watched because it accounts for 70 percent of total economic activity.

The more gradual the pump-price increase the more manageable it is for family budgets, retail consultant Howard Davidowitz said.

Given time to adjust, people “can decide what to do,” Davidowitz said. “Maybe they can buy less. Maybe the kids can’t have the ice creams anymore.”

Or maybe people will remain tentative about getting behind the wheel more than is absolutely necessary.

Average daily gasoline demand in the U.S. in 2009 was essentially flat from the year before, at 377.5 million gallons. It is expected to remain level in the year ahead, according to Tom Kloza, publisher and chief oil analyst at Oil Price Information Service.

There are other factors keeping Americans off the road beyond high gas prices. Chief among them: lack of job security. Unemployment is 9.7 percent in the U.S., meaning fewer people commuting to work or driving on vacation.

Oil prices will continue to be supported by demand from China. This week, Premier Wen Jiabao has promised to maintain enough stimulus spending to coax China’s economy to 8 percent growth this year.

But elsewhere around the globe, energy demand will remain weak. Americans burned 18.8 million barrels of petroleum a week in January, according to EIA, the lowest average for the first month of any year since 1998.

In Europe, GDP should grow about 0.7 percent this year, according to the European Commission. The Organization of Petroleum Exporting Countries forecasts that European oil consumption will decline by 1.4 percent this year.

Energy-intensive industries feel particularly constrained.

On average, U.S. airlines bought 4.5 million fewer barrels of jet fuel each month in 2009, compared with 2008. Corporate travel, the more lucrative part of the business, fell dramatically last year and has only recently shown signs of a turnaround.

Things have been just as tough for shippers. Consumers and businesses sent fewer packages and moved fewer goods. The use of distillate fuels, which includes the diesel used by trucks, dropped 8 percent in 2009.

Oil supplies are expected to continue rising. That should keep prices under control. The EIA expects OPEC nations to raise oil production by 400,000 barrels per day to 29.5 million barrels per day while non-OPEC nations increase output by about 500,000 barrels per day.

Compared with years past, this spring’s run-up in gasoline is forecast to be moderate. If gas averages $3 a gallon nationwide on Memorial Day, that would represent an increase of about 13 percent since the start of the year. That compares with a nearly 50 percent increase in the same period a year ago and 29 percent in 2008.

Back in 2008, the average gas price topped $4 per gallon in the summer. Don’t expect prices to test those levels this year.

“To get to $3.50 you need crude prices near $120 or $125 per barrel. Numbers not in realm of probability of 2010,” said Kloza. “$3 is reasonable number for a peak.”

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