High Gasoline Prices Expected to Have Little Impact on Holiday Travel

Record-high gasoline prices, particularly in the Midwest, have prompted a Federal Trade Commission investigation, put pressure on states to decrease or eliminate the gas tax and been blamed for the recent drop in consumer confidence. But they aren't deterring Americans from planning to take to the roads this holiday weekend.

At the beginning of this week, Americans were paying an average $1.66 a gallon at the gas pumps, nearly an all-time high. That's 54.5 cents more than a year ago. Some Midwest motorists were paying more than $2 a gallon to fill their cars.

Yet 37.5 million people, or one in seven Americans, are expected to travel this weekend -- 85% of them in a motor vehicle, according to the American Automobile Association. That would make this the second-most-popular Independence Day holiday weekend for traveling on record -- just behind 1986, when 38 million Americans traveled during the holiday.

"The economy is strong, the market has been very good, people feel good about themselves and July 4 is a popular weekend," said Jerry Cheske, a spokesman for AAA. "People for a large part have already accounted for the higher prices."

The Independence Day holiday is typically the second-most-popular period for travel in the U.S. behind the Christmas holiday season. AAA defined travelers as those planning to go at least 100 miles from home.

But how much farther could be affected by the prices at the pumps.

"People will continue to travel, but they won't go as far," said Sophia Koropeckyj, an industry analyst at The Dismal Scientist, an Internet economic research site run by Dismal Sciences.

She added that higher fuel prices could also contribute to what she expects will be diminished travel plans for the summer as a whole.

Still, AAA said higher gas prices haven't affected most travel plans yet.

"A driver whose car gets 20 miles to the gallon will pay just $25 more to travel 2,000 miles, so the gas prices have not yet played a major role in changing travelers' plans," said Tim Irwin, managing director of travel services for the Automobile Club of Southern California, a branch of the AAA.

But analysts warned that if demand doesn't diminish, price pressures could continue to climb.

"Unless U.S. motorists are deterred by record gasoline prices, this year's demand should surge and keep pressure on the market," Alan Marshall, an analyst with Credit Lyonnais Securities Asia, wrote in a report issued Wednesday.

The situation has been compounded by shortages of gasoline newly reformulated to meet summer specifications, which industry analysts say wasn't produced in sufficient quantities. As stock levels slipped lower, gas prices headed higher.

"If anything, the extent of the stock depletion and price gains has exceeded expectations," Marshall added.

While implied gas demand fell to 8.5 million barrels per day last week from 8.78 million barrels per day the week before, the federal Energy Information Administration expects overall demand this summer to reach a new record for the seasonal period. EIA projects demand will average 8.72 million barrels per day over the summer -- up 130,000 barrels per day, or 1.5%, from last summer.

U.S. refiners are running at record levels, producing as much or more gasoline as in most recent years, according to the American Petroleum Institute, a national trade association representing the petroleum industry. But Americans are driving more as well, putting even more upward pressure on oil prices.

Crude oil prices are already at their highest level in almost a decade, about 300% above prices a year and a half ago, according to the EIA. The price for crude oil rose again this week, though supplies are growing.

Gasoline supplies unexpectedly rose 1.77 million barrels last week, according to the API, compared with analyst expectations for a drop between 1 million and 1.5 million barrels. The Organization of Petroleum Exporting Countries announced a week ago that it would increase production quotas by 708,000 barrels per day beginning next month.

But Marshall, from Credit Lyonnais Securities Asia, predicted that extra barrels from OPEC will arrive too late to assist the U.S. gasoline market.

That's in part because OPEC's 11 member countries are already producing above their quotas. The new deal might actually yield just 200,000 new barrels of crude oil a day, added Marshall.

In addition, other factors -- from market speculation to taxes on petroleum products -- have helped contribute to the recent rise in oil prices.

Still, crude oil costs represent the single largest component of the retail price for gas, accounting for about 43% of the price at the pump for regular grade gasoline, according to the EIA.