Uncle Sam Says Get Ready to Spend for Energy This Summer

May 9, 2007 — -- It will likely come as no surprise to motorists across the country that gasoline prices will be higher this summer when compared with last year's, according to the Energy Department.

The Energy Information Administration, the statistical branch of the Energy Department, reported Tuesday that it estimates the average price for gasoline during the upcoming summer months will be $2.95 per gallon, an increase from the average price of $2.84 per gallon last summer.

The EIA predicts the monthly average price in May and July will be even higher, at $3.01 per gallon.

Already gasoline prices have surpassed that estimate. Monday, the EIA reported that a gallon of regular unleaded gasoline soared to $3.05 on average last week, only 2 cents from the nominal record set in the weeks after Hurricane Katrina took out a third of the nation's refining capacity.

Econ 101: Supply and Demand

The higher prices can be partly attributed to a growing global demand for oil. Even though the price of a barrel of oil has hovered around $60 to $65 for months, oil consumption worldwide has not slackened. And the government projects demand will increase by 1.4 million barrels per day in 2007, with the United States and China making up half of that new demand.

In the first three months of this year, the United States has consumed 20.9 million barrels of oil a day, up 2.6 percent from the same period a year ago.

Also pushing gasoline prices higher have been below average inventories levels for both crude oil and gasoline. Earlier Wednesday, the EIA reported that supplies of both jumped last week and refineries ran at 89 percent of their capacity, up from the previous week.

But while inventory levels rose last week, they are still below the average for this time of year, according to the EIA. That means less of a reserve should there be a surge in gasoline consumption this summer. Less gasoline available while demand is high could translate into even higher prices than currently predicted.

Electricity to Cost More

Powering up that air conditioner this summer will also cost consumers more.

Electricity prices are predicted to increase 2.6 percent during 2007 as demand for electricity continues to climb at what the EIA calls a normal rate of 1.5 percent.

But many consumers could be paying even more as some electricity markets undergo restructuring that started in the mid-1990s when the industry began to deregulate. For example, the government predicts rates will increase nearly 6 percent in the east-north central regions of the United States -- including Illinois, Indiana, Michigan, Ohio and Wisconsin.

The Edison Electric Institute, a trade group that represents three-quarters of the electric industry, said supplies should be adequate this summer, barring any unexpected shutdowns at power plants or extremely hot temperatures over a prolonged period of time.

Stan Johnson, with the North American Reliability Corp., an organization that sets mandatory standards for the industry, agreed.

"As we look at the coming summer, we feel fairly confident that we can get all the energy that we need and supply the customers' needs," Johnson said.

Still, Johnson said, certain parts of the country that faced tight supplies last summer, such as California and the Northeast, will most likely face the same supply issues again this summer.