Gasoline Prices Up 8 Percent, Fueled by Supply Fears, War Rhetoric

abcnews.go.com The Associated Press NEW YORK Feb. 5 —

The retail price of gasoline is up 8 percent since the start of the year, fueled by high oil costs and traders' self-fulfilling fears of an upward trend as the U.S. considers military action in Iraq.

"Traders are afraid that the next barrel they buy will be more expensive than the one they bought today," said Tom Kloza, director of the Oil Price Information Service, a Lakewood, N.J., publisher of industry data. That fear is contributing to the aggressive buying, he said.

The wholesale price of gasoline on the New York Mercantile Exchange rose 1.7 cent to $1.018 per gallon Wednesday afternoon, its highest level since May 2001. At the pump, the average price of regular unleaded gasoline is $1.53 per gallon, up 11 cents since the year began and 43 cents higher than a year ago.

Analysts said the main drivers on wholesale markets Wednesday were the latest government supply data and the case made against Iraq by Secretary of State Colin Powell.

Prices rose sharply early in the day after weekly Energy Department statistics showed thinning U.S. inventories of gasoline and distillates, which include diesel and heating oil.

Later in the day, prices retreated somewhat as traders determined that Powell's presentation had done little to sway key members of the U.N. Security Council that immediate military action in Iraq was needed. Representatives of China, Russia and France said the U.N. weapons inspectors' work should continue.

Aside from the threat of war in Iraq, the lengthy political and economic crises in Venezuela have also propped up world oil prices for months. The price of crude has been above $30 a barrel since mid-December and traded at $33.68 on Nymex Wednesday afternoon.

Venezuelan exports of crude oil and refined products have increased in recent weeks, but not enough to calm U.S. energy markets, analysts said.

Nationwide supplies of gasoline dwindled by 3.4 million barrels to 209.6 million barrels, or 5 percent below year-ago levels, according to the Energy Information Administration, the Energy Department's statistical arm. That slight shortfall does not fully explain why retail gasoline prices are 40 percent higher than last year, analysts said.

"We've got a market here being driven by psychological influences," said Peter Beutel of Cameron Hanover in New Canaan, Conn.

On the other hand, Beutel said the rise in heating oil prices is deservedly in response to diminishing supplies after several cold weeks of winter on the East Coast, where most of it is consumed.

Distillate supplies declined by 10.3 million barrels to 112.1 million barrels, or about 19 percent below last year's level, the EIA reported. The wholesale price of heating oil rose 1.6 cent Wednesday to 97.80 cents per gallon up 82 percent from last year.

Analysts said some refiners have reduced output in recent weeks in preparation for the shift from winter- to summer-grade fuel. The annual switch to cleaner-burning gas before the busy driving season requires shutting down equipment, scrubbing it clean and starting all over again a process that causes supplies to contract and prices to move higher even under the best conditions.

This year, the impact of these so-called turnarounds is being magnified by the possibility of a U.S.-led invasion of Iraq, analysts said.

"We're probably going to start the summer driving season at higher levels than we have in a long time," said Phil Flynn, an analyst at Alaron Trading in Chicago. "There's a lot of bad news in those inventory reports."

The biggest wild card is still the Iraq situation, Flynn said. "The general consensus is the sooner we get rid of Saddam Hussein, the sooner oil prices will come down."