Worst time for price of gasoline to be soaring

Gasoline prices, which for months lagged behind the big run-up in the price of oil, are suddenly rising quickly, with some experts saying they could hit $4 a gallon by summer.

Diesel is hitting new records daily and oil closed at an all-time high Tuesday of $100.88 a barrel.

The increases couldn't come at a worse time for the economy. With growth slowing, high energy prices once easily absorbed by consumers are now more likely to act as a drag on household budgets, leaving people with less money to spend elsewhere.

These costs could worsen the nation's economic woes, piling a fresh energy shock on top of the turmoil in credit and housing.

"The effect of high oil prices today could be the difference between having a recession and not having a recession," said Kenneth Rogoff, a Harvard economist.

The depth of the nation's economic problems became clearer Tuesday with the release of figures showing prices at the producer level rose 1 percent in January from December, driven in large measure by energy costs. Compared with a year ago, prices were up 7.4 percent, the worst producer-price inflation in the United States since 1981.

Other new figures showed home prices around the country were falling at an accelerating pace, suggesting no end in sight for the housing slump.

As of Tuesday, regular gasoline was selling at a nationwide average of $3.14 a gallon, according to AAA, the automobile club, up from $2.35 a year ago. The price has jumped 19 cents a gallon in two weeks. In the Seattle-Bellevue-Everett area, regular was selling at $3.35 a gallon, up from $2.52 a year ago.

Energy specialists predict that as demand picks up further this spring and summer, the nationwide average retail price will surpass its high of $3.23 a gallon, set last Memorial Day weekend.

Tuesday, the nationwide average diesel price rose to a record $3.60 a gallon, compared with $2.62 a gallon last year. In the Seattle-Bellevue-Everett area, diesel was selling for $3.72 on Tuesday.

For a decade, rising oil prices had failed to dent global economic growth. In the U.S., consumers absorbed the higher costs thanks to easy credit and rising prosperity. In developing countries, government subsidies helped ease the pain.

The rise in energy prices was a result of growing demand around the world.

The price of oil has quadrupled in six years, and the close Tuesday was not far below the inflation-adjusted all-time high set in April 1980, after the Iranian revolution. That record, $39.50 a barrel, equals $103.76 in today's money.

As oil prices spiked last fall, low wintertime gasoline demand helped keep prices in check. But now, experts say, the price of oil is finally showing up at the pump.

For people like Phyllis Berry, 31, a General Motors factory worker in Cleveland, the price is starting to hurt.

"I used to fill it up pretty regularly, but now I drive it until the tank is almost empty, looking for the cheapest place to buy gas," said Berry, who drives a beat-up Dodge Caravan.

She used to take her four children to the movies four or five times a month. Now it's once a month.

Still, things are not as bad as during the 1970s and 1980s oil shocks. In the early 1980s, at the height of the last energy crisis, energy accounted for about 8 percent of household spending.

As prices fell and the economy became less energy-intensive, energy costs fell to less than 4 percent of household spending in the early 1990s.

With the run-up in prices in recent years, economists say, energy's share of disposable income is slowly creeping up again. In December, that figure reached 6.1 percent, the highest level since 1985.

The increase of 2 percentage points — amounting to $200 billion — is a little less than half what Americans spend each year on new cars and automobile parts.

"You're adding an oil shock on top of a crunch on credit and a housing collapse," said Nigel Gault, an economist at Global Insight. "Even the U.S. economy cannot withstand all of that at the same time."

Consumers have responded belatedly by cutting back on their energy use. Oil demand in the U.S. grew just 0.4 percent in 2007 and is expected to be flat in 2008.

But global demand, the driver behind higher prices, is still expected to increase 1.4 million barrels a day this year. That growth, from China and the Middle East, may help keep prices up, whatever happens to the U.S. economy.

According to the latest forecast by the Energy Department, nationwide gasoline prices should peak near $3.40 a gallon this spring.

But many analysts consider the government's forecast conservative, foreseeing a sharper spike as refiners come out of the seasonal maintenance period and start producing summer-grade gasoline in March and April.

"We've gone this high without the normal summer dynamics," said Tom Kloza, publisher at the Oil Price Information Service. "That's when I think we will have the big jump — of 50 cents to 75 cents a gallon."

Kloza said he expected gas to peak around $3.50 to $3.75 a gallon nationwide. Geoff Sundstrom, AAA's spokesman, added that $4-a-gallon gasoline is possible this summer.

"We've gone from a worrying situation for gasoline to one that is quite alarming," Sundstrom said.

While demand keeps growing, producers are struggling to catch up. They are not replacing the oil pumped from the ground fast enough because of restrictions on access to fields, as well as costs. Meanwhile, global demand is expected to push oil consumption up by more than 1 million barrels a day, each year, for the next decade.

"An oil crisis is coming in the next 10 years," John Hess, the chairman of Hess Corp., said at a recent conference hosted by Cambridge Energy Research Associates. "It's not a matter of demand. It's not a matter of supplies. It's both."