Gas Is Up; Drivers May Not Cut Back

Thanks to lower fuel costs and a proliferation of travel bargains, Americans are expected to hit the roads this Memorial Day weekend in bigger numbers than last year.
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Today's Business: Jad Mouawad on the Rebound in Oil Prices
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Times Topics: Oil and Gasoline

Last summer’s energy shock drove gasoline prices well above $4 a gallon and forced people to cut back on driving. Then oil prices plunged, and the stratospheric cost of a gallon of gas became a dim memory. But gasoline has been rising rapidly in recent weeks.

Gasoline is selling for an average of $2.33 a gallon, up from $2.06 just last month, according to AAA, the automobile club, and a steep rise from the recent low of $1.67 a gallon in December. A cutback in refining production and the expected rebound in driving this weekend are helping to push up prices at the pump.

Some analysts expect to see gas rise above $2.50 a gallon this summer.

The number of people traveling by car this weekend is projected to rise by 2.7 percent compared with 2008, to 27 million people, according to projections from AAA. Last year, road travel fell by 9.6 percent when prices surged, according to the automobile group.

“The bargains and the cheaper gas, combined with the stressed-out consumer who is ready for a break, will trump other concerns,” Robert L. Darbelnet, AAA’s chief executive, told reporters last week. “It is a slight uptick. In this economy, any uptick over last year is a positive sign.”

The jump in demand that accompanies summer travel is just one of many factors that are driving up energy prices.

Oil prices rose above $60 a barrel on Wednesday in New York, settling at $62.04, the highest level since November, after a weekly report from the Energy Department showed a drop in commercial inventories and gasoline production was curbed by fires at two refineries, in Texas and Pennsylvania.

Some analysts also say they believe that the worst of the economic slowdown may be over, even if a recovery could take a long time, infusing some optimism into the oil market. The Energy Department said recently that oil prices had risen after suggestions the economy “may have reached a turning point in the current recession.”

“Oil prices have improved markedly in recent weeks, largely on ostensible signs that the global economy has begun its long-awaited recovery,” according to a report by PFC Energy, a consultancy. “But while evidence is mounting that the worst of the contraction is behind us, a broad economic recovery is still some time away.”

Oil markets are also weighing the effect on global supplies of a fresh round of violence in the Niger Delta, Nigeria’s oil-rich region. Last week, the Nigerian government started its biggest military offensive in the delta in years, mounting helicopter raids and naval attacks on militant camps.

The largest rebel group in the region, the Movement for the Emancipation of the Niger Delta, responded with calls for “an all-out war” and said it blew up two pipelines over the weekend.

The fighting is threatening to further disrupt supplies from Nigeria, Africa’s top oil and gas exporter. Security forces clashed with militants on Tuesday near a flow station operated by Chevron in the western part of the Niger Delta, according to a report from Reuters. On Wednesday, Eni, the Italian oil company, said it was invoking emergency contract provisions that allow it to suspend export obligations at its Brass River terminal in the delta.

Nigeria’s state oil company, NNPC, said there had been no significant impact on oil production so far. “The success of the military campaign means that production can go on,” Levi Ajuonuma, a spokesman for the company, told Reuters.

Higher prices will be the main topic on the agenda of the Organization of the Petroleum Exporting Countries, whose members meet next week in Vienna to consider new production targets for the next few months. More than anything else, it was action by the members of the OPEC cartel that has helped push prices up since the beginning of the year.

After peaking at a record close of $145.29 a barrel last summer, oil prices slumped to a closing low of $33.87 a barrel by December as global credit markets froze and the global economy went into a tailspin.

In response, OPEC members agreed to cut their output by 4.2 million barrels during several rounds of feverish meetings over the last eight months, helping set a floor on the market.

Despite the recent market rally and fragile optimism about the state of the economy, oil consumption in the United States, and across much of the world, still remains weak. In its latest monthly report, the International Energy Agency estimated that daily average oil consumption in 2009 would drop to 83.2 million barrels, a drop of 2.6 million barrels, or 3 percent, from last year.

“The pace of contraction is close to early 1980s levels, with a growing consensus that economic and oil demand recovery will be deferred to 2010,” the energy agency said. “A quick recovery remains so far elusive.”

In the United States, oil demand has dropped without interruption for 15 months. According to the energy agency, oil demand fell by 5.9 percent in March, compared with the same time last year.

But the Memorial Day weekend could reverse that trend, if only temporarily, analysts said.

“You give the American consumers a reduction in price and consuming confidence is getting slightly better, I think people go back and take their vacations,” said Lawrence Goldstein, an energy analyst. “They don’t go on a spending binge, but they ease up a little bit.”