Originally created 03/16/04

Gasoline demand rising despite record-high prices at the pump



WASHINGTON -- Despite near record-high gasoline prices, U.S. motorists continue to increase consumption and, with supplies tight, that is helping to keep fuel costs propped up.

The Energy Department reported Monday that nationwide retail gasoline prices averaged $1.72 per gallon last week. Meanwhile, the price of oil surged to $37.44 per barrel on futures markets, the highest level in more than a year, in part because of the rising cost of motor fuel.

"Gasoline demand has been pretty spectacular of late," said Tom Kloza, director of Oil Price Information Service, a Lakewood, N.J., publisher of industry data.

The most recent statistics from the Department of Energy show that gasoline demand has been roughly 3.7 percent higher than last year over the past four weeks. At the same time, nationwide supplies of gasoline are 1.2 percent below year ago levels at 220.4 million barrels, and 5 percent below the 5-year average.

Average daily gasoline consumption for the month ended March 5 was about 8.9 million barrels, up from 8.5 million barrels a year earlier.

Analysts attribute this increase to improving economic conditions, rising population and consumers' preference for gas-guzzling SUVs.

"Year after year, we have increasing demand, even throughout the recent economic difficulties," said AAA spokesman Geoff Sundstrom.

"For most people, their use of gasoline is inelastic," Sundstrom said. "That is, in the course of a typical day, they need to drive back and forth to work, get their kids from school and go to the supermarket."

At most, Sundstrom added, there might be "an incremental response to higher gas prices."

In the future, Sundstrom believes Americans may shift to more fuel efficient vehicles again - as they did in the 1970s when the country faced gasoline shortages. Only this time, the response could be purely price driven, he said.

What's worrisome right now to Kloza and other analysts is that gasoline demand barely tapers off as much as it used to during winter, keeping pressure on the domestic refining industry year round.

This is the time of year when refiners temporarily shut down to conduct maintenance before ramping up production of special blends of cleaner-burning gasoline required for the busy summer driving season. As a result, supplies tend to contract.

Kloza believes U.S. gasoline demand could average 9.5 million barrels per day or more this summer.

Today, imports are bridging a 750,000 barrel-a-day gap between domestic supply and demand. When summer arrives, the extra demand and the need for federally mandated cleaner-burning fuel will place additional pressure on refiners here and abroad.

"The market seems to be building that scenario into the price already," said Tom Bentz, an oil analyst at BNP Paribas Commodity Futures in New York.

And as refiners attempt to boost their output - both to meet demand and to increase market share amid high prices - they run a greater risk of experiencing mechanical problems that could force them to temporarily shut down. This, of course, would crimp supplies further and likely drive prices higher.

"You can easily come up with the scenario for problems in July and August," Kloza said.

The tight supply situation nationwide has been exacerbated by the fact that refiners are maintaining extremely lean inventories these days because of the high price of crude oil, another factor contributing to higher fuel prices.

On Monday, the price of April oil futures surged $1.25 to $37.44 per barrel on the New York Mercantile Exchange. It was the highest closing price since March 12, 2003, when Nymex oil futures were $37.83 per barrel.

The 4 percent rise in the price of oil on Monday was also attributed to OPEC's plan to cut production by 1 million barrels a day on April 1, as well as to terrorism fears stoked by last week's train bombing in Madrid.

April heating oil futures climbed 3.8 cents to 91.69 cents per gallon on a late winter cold snap in parts of the Northeast, while gasoline futures rose 3.5 cents to $1.13 per gallon.

The average retail price of unleaded gasoline declined by 1.4 cent for the week ended March 15 to $1.724 per gallon, according to the Energy Department. That's 2.6 cents higher than a year ago.

Natural gas for April delivery rose 12.2 cents Monday to settle at $5.718 per 1,000 cubic feet.