Gas prices expected to keep rising

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Customers fill up at a station in Needles, Calif., where premium gas was selling for more than $2 per gallon this week. Analysts expect prices to climb in the summer. Bloomberg News Service

And analysts say that means motorists, who already have started to see higher prices at the pumps, are likely to see even further rises as the peak summer driving season approaches.

The worsening conflict between Israel and the Palestinians and the potential for an Iraqi-led oil embargo is keeping world oil markets on edge.

But Ali Tahghighi, an analyst at Barclays Capital, said oil prices should stabilize soon, barring a major escalation in tensions in the Middle East — home to two-thirds of the world's proven oil reserves.

"I think prices are a bit overdone right now," he said. "I don't think the possibility of a disruption justifies a continued increase like the one we've seen in the past few weeks."

The increase is even steeper if measured from Nov. 19, when crude futures bottomed out following the September terrorist attacks. U.S. front-month futures for light, sweet crude have ballooned from an intraday low of $16.70 a barrel on Nov. 19 to a high Tuesday of $28.10.

"We think the price is really too high for the fundamentals, the economic side of the argument," said Leo Drollas, chief economist at the Center for Global Energy Studies.

Costlier crude is filtering through to the pump. Drollas estimates that the U.S. retail price for unleaded gasoline was 20 percent higher on March 21 than for its average in February.

And as fuel prices climb, the effect is rippling throughout industries. The nation's moving and package delivery companies aren't, for example, shy about passing on the cost to consumers.

United Parcel Service of America Inc., for example, will increase its fuel charge in May to reflect the higher March prices, to 0.75 percent, from the current 0.5 percent, a spokesman said.

"We know that our customers don't like it," said spokesman Steve Holmes said. "We had to protect ourselves against abnormal surges in the fuel prices."

UPS also is looking at other ways to better manage its fuel costs. The company is testing a hybrid vehicle that could lower its fuel bills, and it is paying more attention to the routes its trucks travel, to ensure they are the most efficient.

The last oil embargo against the West by Middle Eastern oil producers was in 1973, as a result of the Arab-Israeli war in October of that year. Since then, the world's wealthiest nations have created the International Energy Agency to provide a cushion against any similar disruption.

Based in Paris, the IEA can tap into 4 billion barrels of strategic oil reserves maintained by its member countries. That's equal to more than five years of Iraqi production, based on the IEA's estimate of Iraq's January output.

If Iraq did lead an embargo, other producers would be eager to fill the gap, analysts said. Non-Arab producers such as Russia, Mexico and Norway would likely pump more oil, as would Saudi Arabia, the world's largest crude producer and exporter.

Unless it feels compelled to make a gesture of support on behalf of the Palestinians, Saudi Arabia is expected to quietly boost production to keep crude prices from rising so high as to jeopardize a recovery in the global economy.