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Why gas prices are going up

Consumer Reports News: May 19, 2009 12:19 PM

Last summer, we saw record high gas prices that sent many consumers trading in their gas guzzlers to buy hybrids and some choosing to ride motorcycles and scooters. Then in the fall, prices went back to more wallet-friendly levels (below $2) and our minds shifted to other issues such as the recession, housing crisis, government bailout of Chrysler and GM, dealer closures, and a variety of economic stimulus packages including the Cash for Clunkers bill. Now, as we head into the Memorial Day holiday this weekend, gas prices are back in the headlines. While prices aren't expected to jump anywhere near the record levels of last summer, they have been quietly inching up.

[Click here for the latest average gas prices on Consumer Reports Online.]

The Energy Information Administration (EIA) predicts gas prices to average $2.21 this summer--$1.60 less than last year. Crude oil is projected to be $53 a barrel, down from the average $100 a barrel in 2008. However, since the beginning of May, gas prices have been creeping up with the largest increase last week when prices rose 16 cents from the week prior to $2.24.

Due to the economy, petroleum demand has been weak and that has kept prices low and has forced refineries to cut their inventory. But new signs are showing that we are nearing the end of the recession and consumer confidence is growing. Low gas prices generated a rebound in demand during February and March. A Reuters/University of Michigan survey found that consumer confidence rose in May above economists' expectations. So, we are at a time where demand is increasing while oil supply is low.

What about diesel?

Historically diesel prices have been less than gasoline, but since September 2004, the price of diesel has been generally higher primarily due to strong worldwide demand. However, last week marked a turning point when the average diesel price fell below that of regular fuel. Key factors for this shift are that diesel fuel consumption is declining in the U.S., plus there is a worldwide decrease in usage as well as output. The demand weakness combined with a recovery in gasoline consumption has caused a shift in price.

The lower diesel price isn't expected to stay as diesel is projected to average $2.27 a gallon this summer--six cents higher than gasoline. For 2009 the average gas price is expected to be $2.17 and 2010 forecasts jump to $2.42 a gallon. Diesel is expected to average $2.30 for 2009 and $2.69 in 2010 according to the EIA.

What does this all mean for consumers?

If all predictions are correct, we will be seeing an increase in fuel costs this summer as demand increases, but the $4.00 a gallon isn't expected to return anytime soon. Hopefully that will be enough to help stimulate the economy by encouraging consumers to start spending and hitting the roads again this summer.

For more information on gas prices, alternative fuels, and saving fuel, see our guide to fuel economy.

--Liza Barth 

Aaron Bailey

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