A Summer of Gas Pains

Drivers are already recoiling from higher fuel prices -- and rethinking travel plans. Some say it'll only get worse from here

Joan Barrett stopped on Interstate 95 just outside Boston recently to fill her gas tank before heading to her weekend house on Cape Cod, one of many trips she and her husband had planned to make this summer. But doing the math makes her wince -- and think twice about her summer plans. With premium gasoline up to $1.85 a gallon, the drive down and puttering around for two days now costs more than $25 -- not including the cost of filling up for the trip back home. "That's $50 just on gas," says Barrett, a real estate agent. "It's cheaper to buy a few lobsters and have a cookout at home than it is just to take the drive down."

Gasoline prices are already giving car-loving Americans sticker shock, and they ain't seen nothing yet. Experts have been warning for weeks that the price per gallon could soar this summer, and early indications are the hikes could be worse than most experts were expecting. In some areas, pump prices already are significantly higher than the record-high levels of last summer, when prices topped $2 in the Midwest. If consumers react badly to the price bump, as some experts think they will, it could be bad news for the struggling U.S. economy (see BW Online, 5/4/01, "The Energy Crunch: Dark Days Ahead?").

Average self-service prices for regular gas recently stood at $2.04 per gallon in San Francisco, $1.88 in Chicago, and $1.72 in New York City. At those prices, a fill-up is like dumping a dozen or more mocha lattes into your gas tank. And some drivers are paying 15% or 20% more than the average price. For instance, regular unleaded gasoline was going for as much as $2.40 on freeways near San Francisco recently. At one Amoco station in Chicago's trendy Wicker Park neighborhood, regular unleaded was priced at $2.09 during the last weekend in April.


  Nationwide, the average cost for regular, unleaded gas is $1.61, already higher than the $1.52 peak the Energy Dept. forecast would be reached in June. That's the third-highest gas price since the early 1980s, and experts say it's likely that unleaded fuel prices could surpass the psychologically important $2 per-gallon average again this summer. Analysts expect prices to spike higher during the main summer driving season, with some pessimists thinking prices could surge to $3 a gallon -- or more.

Will a few dollars more per fill-up cause travelers to scale back their plans? Unlike last summer, it seems plausible. Consumer confidence in the economy is at its lowest since 1997 and is down 13% in the last year, as consumers fret about a possible recession. U.S. companies have laid off more than a half-million workers since January according to a Bureau of Labor Statistics study released Apr. 26 -- a 25% increase over last year. And more job losses are expected.

Many consumers are already reacting to the price hikes. In Chicago, graphic artist Mike Wentworth makes now weekly detours to avoid buying gas at his local Amoco station, which charges $2.09 per gallon. "It makes me angry because I bought a fuel-efficient car, and I don't feel like I'm gaining anything," he says.


  As more consumers absorb the bad news, the reaction could become far more pronounced. "There's going to be more backlash because of the slower economy," predicts Jim Smith, a professor of finance at Maguire Energy Institute at Southern Methodist University in Dallas. "Consumers are outraged."

In a survey released in April by the Travel Industry Assn., 43% of American drivers surveyed said they would seriously consider canceling their travel plans if gas prices reach $2 a gallon. Only 15% said gas prices have little or no bearing on their travel plans. People will shield themselves by staying closer to home, says Roger Sinclair, a spokesperson for the American Automobile Association of New York. He notes a troubling sign: He says AAA's cruise bookings have risen sharply because vacationers like the idea of the all-inclusive cost, which insulates them from price fluctuations at the pump and other expenses, such as meals and hotels.

Auto makers, among others, may suffer. With the economy slowing, April car and truck sales are estimated to have dropped 10% compared to April, 2000. If current trends hold all year, U.S. car and truck sales will drop 8% this year, to 16.6 million units.


  The big question for Detroit, however, is whether sales of gas-hungry but highly profitable vans, pickup trucks, and sport-utility vehicles will remain strong. One would think sales of gas-guzzlers would be tanking: Gas alone for a round-trip from New York to Charleston, S.C., in a 44-gallon Ford Excursion now costs around $270. Amazingly, though, SUV sales jumped 10% in April. "Until people stop using gas-hungry cars, the prices are going to stay at about the level that we are seeing now," warns SMU's Smith.

Meanwhile, gasoline inventories rose anywhere from 3 million barrels to 5.1 million barrels in the last week in April, depending on whose estimate is used. Prices should ease temporarily over the next few weeks, says Michael Paslawskyj, vice-president for economic research at CIT Group, a financial services company in Livingston, N.J. "But I don't think the summer driving season will be that great this year given the economic slowdown and rising unemployment," he says.

If consumers get up in arms and call on politicians to act, will governments step in? John Kilduff, an analyst at Fimat USA, believes they will. When the average national gasoline price hits $2, he thinks the Environmental Protection Agency is likely to waive clean-gas requirements for the summer driving season. States also could step in to give consumers some relief on gas taxes, as some states did last year.

Everyone knows it could be a long, hot summer. But politicians don't want drivers to get too hot under the collar.

By Suzanne Robitaille in New York

Edited by Thane Peterson

Before it's here, it's on the Bloomberg Terminal.