More pain at the pump

  • Article by: JOHN J. OSLUND and THOMAS LEE , Star Tribune
  • Updated: March 11, 2008 - 11:52 PM
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Retail gas prices rose overnight to a record national average of $3.22 a gallon. In Minnesota, prices reached $3.06 per gallon Tuesday, still below the state record of $3.27 set last May.

Photo: Amy Sancetta, Associated Press

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Oil prices have blown past historic highs and just keep rising. The benchmark oil futures price closed at a record $108.75 per barrel Tuesday -- the fourth record high in the past seven trading days.

Following oil's lead, U.S. gasoline prices jumped to a record national average of $3.22 per gallon -- and we're still two months away from the summer driving season, when gas prices normally peak. Food prices and airfares are rising as higher oil prices leach into the economy.

Why the surge? Strong demand, a weak dollar (the currency in which even foreign oil is denominated), speculation in the markets and OPEC's decision last week to hold oil output at current levels have fueled the spike and sparked finger-pointing around the world.

As the U.S. and European economies slow, demand for oil historically cools, sending prices down. But Asian economies are still growing briskly, particularly China's and India's.

As a result, the International Energy Agency said Tuesday it expects net global demand to grow this year by 1.7 million barrels a day, putting 2008 average daily global demand at about 87.5 million barrels per day.

OPEC ministers have blamed surging oil prices on mismanagement of the U.S. economy by the Bush administration, the U.S. trade deficit and the weak U.S. dollar.

President Bush shot back, saying "it should be obvious to all that the demand [for oil] is outstripping supply." The United States, he said, must change its habits. "We've got to get off oil," he said.

Vice President Dick Cheney, who travels to the Middle East next week, will stop in Saudi Arabia, where he's expected lobby the world's biggest oil producer to pump more crude.

But the cartel said last week it does not plan to revisit production quotas until its September meeting, a decision likely to contribute to continued oil price speculation over the summer -- with its volatile effects on stock and commodities markets. Despite Tuesday's stock market rally, the Dow Jones industrial average remained down 8.4 percent for the year; oil prices, meanwhile, have jumped 13 percent.

Food

Higher oil prices mean pricier groceries, albeit indirectly. With growing calls for the country to reduce its dependence on foreign oil, rapid development of ethanol as an alternative has sapped the nation's corn supply. In the United States alone, the use of corn for ethanol has grown two and a half times since 2000.

That has pushed up demand for corn, and the foods and feed that are corn based. Manufacturers such as General Mills and Sara Lee are charging more for cereal, while the price of eggs, chicken and beef has also risen. In addition, farmers have devoted more of their acreage to corn, leaving less room for crops such as wheat. Less wheat means higher prices for bread.

The result: Food inflation has more than doubled during the past 14 months, with the cost of some dietary staples soaring even faster.

Air travel

To offset soaring jet fuel costs, Northwest Airlines, Delta, and Continental Airlines have tacked on fuel surcharges to already rising fares. From late December to late February, the major airlines raised fares and added fuel surcharges by a total of $70, according to Bestfares.com.

Expect things to get worse as the summer travel season approaches, especially along less-traveled domestic routes and popular European destinations, said Tom Parsons, chief executive and founder of Bestfares.com.

So while a traveler can go coast-to-coast for less than $200, getting into a regional airport such as Key West, Fla., or Baton Rouge, La., can cost three or four times that much. Also, Europeans are expected to flock to the United States this summer to take advantage of the weak dollar, further driving up demand and prices.

Parsons' advice? Book now for summer travel. If they don't, travelers will need to closely monitor fares during the summer in order to nab any last-minute Internet sales that might pop up.

"The airlines are going to be really stingy with the cheap seats," Parsons said.

Gasoline

The average gas price in the Twin Cities on Tuesday was about $3.04 a gallon, about 54 cents higher than the same time a year ago. (The statewide average was about $3.06.) But even that might seem like a bargain as the summer travel season approaches.

Jason Toews, co-founder of Twincitiesgasprices.com, thinks gas prices will hit $4 a gallon by Memorial Day weekend. Despite high gas prices, people over the past few years have continued to travel, said Dawn Duffy, a spokeswoman for AAA Minneapolis. That could change this summer with more people forsaking travel or taking shorter trips, she said.

Duffy declined to predict how high prices will go, saying that "we didn't even think gas would stay above $3."

"There is nothing playing in our favor," Duffy said.

John Oslund • 612-673-7206 oslund@startribune.com

Thomas Lee • 612-673-7744 tlee@startribune.com

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