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Get Used to High Gas Prices, U.S. Says

Times Staff Writer

On a day when California gasoline prices set a new high, the Energy Department forecast Thursday that record pump prices will not only rule the road this summer, they’ll stick around through 2006 as motorists’ thirst for fuel shows no sign of abating.

California’s fuel costs are expected to remain substantially higher than the nation’s this summer, with prices 25 cents to 50 cents above the predicted U.S. average of about $2.28 a gallon during the peak driving season, according to the Energy Information Administration, the Energy Department’s statistical arm.

Meanwhile, gasoline continued its relentless climb Thursday. California’s average retail price for regular gasoline hit a record $2.554 a gallon, an increase of 4.1 cents from Wednesday and 32.3 cents from a month ago, according to AAA, the nationwide auto club. California requires a cleaner-burning recipe produced by few refineries outside the state, contributing to the higher price.

The U.S. average for regular gasoline reached a record $2.251 a gallon, up 2.3 cents from Wednesday and up 31.3 cents in the last month, AAA said. Every state in the nation saw gasoline touch fresh highs Thursday.

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“Every day this week there’s been a higher price than the day before,” said Elaine Beno, a spokeswoman for the Automobile Club of Southern California.

Just last month, the government had projected that gasoline might average $2.10 a gallon in the summer but would dip below $2 in late 2005 and stay there for much of next year. But after that forecast was issued, the agency pumped up its oil price expectations for the period.

The latest outlook renewed questions about the effect of costly fuel on families and the economy. For low-income households in particular, the choice increasingly is becoming: “Do I fill my gasoline tank or do I buy something else?” said Mark M. Zandi, chief economist at consulting firm Economy.com.

Overall, the government report sees no short-term relief for motorists. Crude oil costs are clinging to exceptionally high levels in response to economic growth and other factors, and refiners have little capacity to boost summer supply.

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“We’re looking at a global crude market that is straining” to meet world demand, Guy Caruso, head of the Energy Information Administration, said in a briefing for reporters.

U.S. crude oil prices shot up after the forecast but then plunged as investors focused on a report issued Wednesday that predicts a sharp increase in U.S. gasoline production. Crude oil for May delivery fell $1.74, or 3.1%, to $54.11 a barrel on the New York Mercantile Exchange, marking a fourth consecutive day of losses.

U.S. gasoline prices are expected to peak at an average of $2.35 a gallon in May, the traditional start of the heavy driving season, and then plateau at around $2.28 through the rest of the summer, 38 cents higher than last summer, the government said. “Similar high motor gasoline prices are expected through 2006,” the report says without offering specifics. Summer diesel prices will average $2.24 a gallon, the report says.

The gasoline price increases are driven by oil, which accounts for about half the cost of each gallon of gasoline. The U.S. forecast figures oil prices will remain above $50 a barrel for the rest of this year and 2006; a year ago today, oil was selling for $36.15.

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Also, the International Monetary Fund said Thursday that high worldwide demand would keep oil supplies tight and could cause spikes as high as $100 a barrel, echoing a report last week by a Goldman Sachs analyst who predicted an oil price “super spike” as high as $105 a barrel.

Despite the surging pump prices, the government analysts predicted no retrenchment in gasoline consumption. Rather, they said, motorists will slurp up 9.3 million barrels a day this summer, a 1.8% increase from last year.

Reasons include a growing number of drivers, the proliferation of sport utility and other vehicles that guzzle gasoline and the assumption that many motorists will take lengthy road trips, Caruso said.

“Highway travel continues to steadily rise,” Caruso said. “It’s rising nearly every year.”

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Businesses cringed at the forecast amid scattered economic warning signs, including some hints of retail weakness and a growing willingness by automakers to offer discounts rather than sacrifice sales.

“It’s frightening,” said Patty Senecal, vice president of Transport Express Inc., a trucking company based in Rancho Dominguez. “It’s very difficult for any business when ... all of a sudden, you get hit with these surprises.”

Senecal is spending an average of $753 to fill a truck’s dual 150-gallon tanks with diesel, and each truck fuels up twice a week. About a year ago, such a fill-up cost $648, and in 1999 it was just $285, Senecal said.

Farmers are worried about shipping costs as transport companies tack fuel surcharges on to their rates.

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“I’m becoming very concerned, real concerned,” said Ken Adams, a sales manager at Growers Express, a Salinas farm that ships lettuce to the East Coast in the summer. “Obviously freight costs will make an impact on sales.”

“It’s a drag,” Zandi said of the rise in energy costs. “The question is: how big a drag?”

A reason for the question is that energy costs represent a smaller share of consumer spending than they used to, and today’s prices when adjusted for inflation are not as extraordinary as they may seem.

In current dollars, for example, gasoline prices peaked in March 1981 at $3.12 a gallon, the government said. At that time, gasoline accounted for about 5% of overall consumer spending; today the figure is less than 3%.

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“We just don’t see oil prices as being the critical issue in the economy at this point in time,” said Christopher Thornberg, senior economist with the UCLA Anderson Forecast.

However, few question that the price surge represents a growing burden.

“California households pay more in gasoline and they use their cars more often than most other Americans,” Zandi said. “Higher gasoline prices this summer will be a heavier weight on Californians than most other Americans.”

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Times staff writer Rong-Gong Lin II in Los Angeles contributed to this report.


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