Summer warning: Gas pains ahead

By Elizabeth Strott

As drivers climb into their cars for Memorial Day weekend road trips, they can look forward to barbecues, swimming pools . . . and severe gas pains.

The national average price for gasoline has soared to just more than $3.22 per gallon, according to AAA's Daily Fuel Gauge Report -- up nearly 37 cents from April and above the record $3.10 per gallon that the Energy Information Administration reported earlier this month.

This spring's prices have topped the former record of $3.07, set on Sept. 5, 2005, after Hurricane Katrina slammed into the Gulf Coast. (See state-by-state price information at the end of this article.)

More than 38 million Americans will travel at least 50 miles from home over the Memorial Day weekend, according to AAA, and 32.1 million will go by car. That's nearly 2% more than the 31.5 million people who hit the roads last year for the holiday weekend.

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When gas prices rise like this, "there is a tendency for economists and analysts to expect people to give up their trips," AAA spokesman Geoff Sundstrom said Wednesday.

But, he added, "we suspect most people who were planning long trips have had those plans in the works for some time now. Those trips have been planned, hotels have been booked, and arrangements have been made. We don't think large numbers of people will be canceling their plans."

Heading higher?

Road trips may still be a go this weekend, but the high prices have consumers, policymakers and the business community all sweating possible summer increases.

The Energy Information Administration's most recent short-term outlook, issued in early May, predicted that gas prices would peak at $3.01 per gallon in May and August, above last year's $2.98 high in July. "On average . . . prices should be around the $3 range throughout the summer," administration economist Neil Gamson said.

But in some areas of the country -- including California, which uses a cleaner form of gasoline that is not produced by all refineries, and the Midwest, where a pipeline problem has restricted supply -- prices could come close to $4 per gallon, Gamson said.

Feeling the price squeeze

The cost of even a penny increase in gasoline is huge to the American consumer, Cameron Hanover analyst Peter Beutel wrote in a note to clients in early May. "Every penny increase in the price of gasoline costs American businesses and consumers $4 million" per day, he wrote.

The numbers are staggering, Beutel said in an interview. For the first 4½ months of 2007, higher gasoline prices cost the U.S. economy $1 billion more than the same period of 2006 -- and a whopping $40 billion more than the first four months of 2002, Beutel said.

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"At some point, consumers are going to be caught between a rock and a hard place. How do you pay for all of these things with rising energy prices and keep the economy running at its previous levels?" Beutel asked.

Although some drivers have tried to organize gas-station boycotts, consumers have few options other than to cut gas consumption or other spending.

More driving, less shopping?

Cutting back on driving apparently isn't the majority's choice.

"Needing gas ranks third behind needing to breathe and needing to eat," economics professor Patrick Welch of St. Louis University told the St. Louis Times-Dispatch this month. "It's a demand for a necessity, not for a luxury."

Retailers, meanwhile, are feeling the impact, with high gas prices causing consumers to cut back on other spending.

The National Retail Federation's 2007 Gas Prices Consumer Intentions and Actions Survey, conducted by BIGresearch in early May, indicated that 40% of consumers are driving less, 32.6% have changed their vacation plans and 24.1% have cut back on clothing purchases.

"Consumers are entering the summer season with a cautious view of increasing gas prices," National Retail Federation CEO Tracy Mullin said in a prepared statement this month. "To offset the effects of higher prices, more consumers are giving their wallets a little extra cushion by cutting back on discretionary spending or choosing to frequent retailers closer to home."

April same-store sales fell for the first time in four years, and analysts blamed gas prices in part for sales tumbles at Wal-Mart Stores (WMT, news, msgs), where sales at stores open at least a year fell 3.5%, the retail giant's worst performance ever, and at Target (TGT, news, msgs), where same-store sales fell 6.1%.

"Unfavorable weather conditions, the Easter calendar shift and higher gas prices combine to create the 'perfect storm' in April," Morgan Stanley analyst Gregory Melich wrote in a note to clients May 7.

The government's reaction

With pain at the pump spilling over into the broader economy, a wide range of observers -- from analysts to consumer advocates -- are starting to cry out for a government response.

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"It is time for Congress and the (Bush) administration to do their part to help alleviate the pain consumers are feeling at the pump," Mark Cooper, the Consumer Federation of America's director of research, said in recent testimony before the House Judiciary Committee. The average U.S. consumer is spending $1,000 more a year on gas than five years ago, according to the federation.

"I'm amazed at the booming silence that we get from our nation's leaders from all sides on the subject," Cameron Hanover analyst Beutel said. "If people telecommute one day a month or commute with one person twice a month, we would have gas demand down 4%, instead of up 1%."

But at the moment, lawmakers appear to be more focused on sounding off about Big Oil profits.

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