The Pump and the Slump

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High gas prices are shown in front of a gas station in Portola Valley, Calif

This wasn't supposed to happen until, well, at least Memorial Day.

National gasoline prices soared by nearly 13 cents a gallon in the past two weeks — the largest spike in a half-century, according to energy analyst Trilby Lundberg. The new national average for a gallon of gas? $1.67. The high regional average is now $1.95, in San Francisco, and a handful of New York City stations have already cleared the $2 mark. And this a month before the summer driving season gets under way.

Don't blame OPEC — at least not completely. The oil-producer cartel hasn't stuck with its pledge to cut production by 1.5 million barrels a day in March, and analysts don't expect the 1 million-barrel reduction promised for April to be as steep as advertised either. Crude oil inventories in the U.S. are up nearly 5 percent from a year ago, to 313 million barrels — but gasoline inventories stand at 192.8 million barrels, a drop of 6.2 percent from this time last year and the lowest springtime level since 1994.

First problem: Refineries. With the spike in demand for heating oil just letting up after a frenzied winter, regular annual maintenance on the plants that turn crude into unleaded has stretched into spring, and crude is piling up on the shelves.

And the closings aren't finished yet — Orion Refining Corp., of Norco, La., hopes to restart one of its refineries early next month, after nearly six weeks of glitch-fighting. Several East Coast refiners still have closings scheduled this spring. And everyone in the refinery business is looking ahead at years of increased demand — and making sure that their plants will be able to run at full steam far beyond this summer.

Second problem — and don't let George W. Bush hear about it, it'll only encourage him — is environmental regulation. The other big energy spike this winter, in natural-gas prices, raised the cost of MTBE, a federally required natural gas–based additive used to reduce emissions and raise octane. And new, stricter regulations involving the annual switch-over from winter gasoline to lower-emissions summer fuel have put additional pressure on spring prices.

So the good news is, it's cyclical. The bad news is that the cycle, as we move from spring to summer, only goes up from here.

Maybe you've heard we're worried about the economy these days, and that consumers — who account for two thirds of U.S. economic activity — are the ones who have to save us. Consumer confidence is already on a slippery slope, having dropped in six of the past seven months. Retail sales are off, unemployment is up, and whether or not the Fed's continued rate-cutting can provide sufficient reassurance to get the stockbrokers back in off the ledges, the average American will almost certainly be watching his wallet very carefully this summer. How carefully could be the difference between recovery and recession. And it could depend in part on gas prices.

Now, conventional wisdom has it that when prices at the pump clear $2 a gallon, summer trips start getting canceled. And guess what — we may already be there.