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The Honolulu Advertiser
Posted on: Saturday, April 15, 2006

Demand for gas stalling as prices rise

By Brad Foss
Associated Press

A gas station in Lynn, Ind., resorted to hand-written notes when its machines couldn't display gas prices properly. Demand for gasoline could flatline this summer with prices still on the rise.


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U.S. motorists will spend an estimated $20.5 billion more on gasoline over the next six months than they did the same time last year, the government says, because of higher prices and increased demand. But they're not happy about the trend, and may just drive less.

"That's it? That's it for $20 bucks?" said Laurie Payne of Plano, Texas, as she topped off the tank of her Land Rover with $2.85-a-gallon regular unleaded and swore the day she trades it in is getting closer.

Some analysts say growth in gasoline consumption, which has been below historical norms since the start of the year, could stall out entirely by summer if forecasts of rising pump prices are correct. While this might crimp consumer spending, which accounts for two-thirds of total economic growth, analysts said the impact should be minimal.

"We're not at gas prices that pose some kind of a tipping point," said Citigroup Smith Barney senior economist Steven Wieting. He added: "There have been botched forecasts of a recession at every $10 move (higher) in crude oil futures," which are just above $69 a barrel.

Bolstering that sanguine view, the Energy Department this week released a report predicting gasoline prices would be 25-cents-per-gallon higher from April through September compared with last year, and average demand during the period would climb by 1.5 percent to 9.4 million barrels per day.

However, the nation's appetite for gasoline is not growing that fast right now, and the possibility of even higher prices in the months ahead has led some analysts to warn of a likely further cooling of demand.

For the first three months of the year, with gasoline futures averaging $1.70 a gallon, gasoline demand rose 0.9 percent compared with the year before, according to Energy Department data. In the first quarter of 2005, with gasoline futures averaging $1.37 a gallon, demand climbed by 1.4 percent compared with the prior year.

Demand for all refined products, which includes gasoline but also jet fuel, residual fuel and distillates such as diesel and heating oil, fell 0.8 percent during the first quarter, compared with a rise of 1.2 percent a year earlier. And globally, demand for oil grew by less than 1 percent in the first quarter, compared with a 2.3 percent jump the year before, the International Energy Agency said this week.

Now, gasoline futures are trading near $2.10 a gallon, and nationwide retail prices are averaging $2.74 a gallon, an increase of 37 cents from a month ago.

"A 40-cent rise in gasoline prices does not stimulate demand, and frankly this is where I think many macroeconomic forecasts for 2006 are going to miss the mark," said IFR Energy Services analyst Tim Evans.

Tom Kloza, an analyst at Oil Price Information Service in Wall, N.J., also said the government's summertime demand forecast is overly optimistic, and added that first-quarter demand figures were probably skewed to the upside by the "hoarding" of blending components needed to make cleaner-burning gasoline. The demand for these chemicals was greater than usual this year, Kloza said, because of the imminent phaseout of an additive called methyl tertiary butyl ether, or MTBE, which has been found to contaminate drinking water.

There's another factor the government and many private analysts may be overlooking, Kloza said, and it has nothing to do with whether motorists can actually afford prices near $3 a gallon. Consumer ire at the high prices "is an emotional component that cannot be underestimated" when forecasting demand, Kloza said.

Larry Goldstein, president of the New York-based Petroleum Industry Research Foundation, said motorists are responding to high prices.

Given the estimated 4.5 percent jump in U.S. gross domestic product in the first quarter, it would be reasonable to assume gasoline consumption would rise at or above the average historical rate of about 2 percent, Goldstein said. Instead, demand growth was less than half that, a decline Goldstein said was likely caused by cutbacks "at the lower portion of the socioeconomic spectrum."

"If prices were to go up another 10 percent, you could look for another 1 percent decline in demand, which would basically flat-line demand," said Goldstein. He added that the choking off of demand through higher prices is evidence of an efficient market at a time when supply concerns are running high.

Gasoline demand was flat year-over-year most recently in the second quarter of 2003, said Evans, though he attributes that to public nervousness about travel after the invasion of Iraq, not higher fuel prices. Before that, there was a slight decline in growth in the second quarter of 2001, and that coincided with a pre-summer spike in prices.

Of course, the most dramatic period of shrinking gasoline demand in the U.S. occurred more than a quarter-century ago, when prices at the pump skyrocketed following the Iranian revolution. No one is predicting that kind of shock will occur at today's price levels.

The usual pre-summer gasoline supply worries are heightened this year by the prospect of tight supplies of ethanol, which is needed in increasing amounts as refiners phase out their use of MTBE. But the biggest factor underpinning higher gasoline prices is the 36 percent rise in crude oil over the past year.