As demand for gas rises, drivers can expect more price swings at pump

Posted on Thu, Apr. 03, 2003 By Gary Richards Mercury News California motorists can expect wild increases in gas prices for years to come -- and the state says it's not because big oil is gouging us.

Motorists in the state are consuming 3 percent more gas every year, and that added demand is outstripping the 1 percent increase that California refineries can realistically be expected to produce annually, said William Keese, chairman of the California Energy Commission.

The state issued a report Wednesday stating that the record run-up in pump prices is caused by market conditions, not manipulation by major oil producers. The report indicated that prices probably will fall below $2 a gallon statewide soon, mainly because crude oil prices continue to ease.

But the long-term prognosis, Keese suggested, is not promising.

California burned 14.2 billion gallons of gas in the first 11 months of 2002, the result of an increase in sales of gas-guzzling sport utility vehicles, longer commutes and a growing population.

Increasing that demand just 3 percent means that roughly an extra 420 million gallons are consumed annually, an increase likely to lead to more wild spikes at the corner gas station.

You're going to need a steady flow of imports, or $2-a-gallon gas is going to be an annual event out there,'' said Mark Mahoney, who tracks fuel prices on the West Coast for Oil Price Information Service. Because you pretty much can forget about building new refineries.''

To offset the state's growing dependence on oil, the Energy Commission is expected to recommend the creation of a gasoline reserve that can be tapped when inventories drop.

Clearly, conserving gasoline is not only important for saving money,'' said Jennifer Mack of the state auto club. It's going to be very important for reducing overall demand in the future. . . . But we also have to learn ways to reduce fuel consumption now.''

The state is considering attempts to reduce the growing consumption by increasing gas taxes and fees and offering rebates and incentives for hybrid cars, which operate partly on electricity. The proposals will be presented to the state Legislature and Gov. Gray Davis in June.

The latest study blames the current spike on several factors, including the doubling of crude oil prices because of uncertainty about war in the Middle East and production interruptions in Nigeria and Venezuela.

However, Keese added, the change from MTBE to ethanol has had little impact on current prices. He said about 80 percent of gas sold in the state is now free of MTBE.

Self-serve unleaded gas was selling for $2.16 a gallon statewide on Wednesday, down 2 cents from the record high of $2.18 set on March 22. San Francisco again had the most expensive gas in California at $2.26 a gallon, while San Jose's average stood at $2.15.

Wholesale prices have dropped about 42 cents a gallon since March 15, but retail prices are falling at a much slower pace -- just a couple of pennies.

But by next Monday they should fall significantly,'' Keese said. We expect prices under $2 in most parts of California by the end of this week. If they are not, we'll be concerned.''

Crude oil fell to $28.50 a barrel on Wednesday, on expectations the war in Iraq would soon end. That's down 28 percent from a 12-year high of $39.99 a barrel in February.

In addition, U.S. crude-oil imports were the highest recorded by the Energy Department since it began compiling weekly figures in 1990.

Contact Gary Richards at grichards@mercurynews.com or (408) 920-5335.