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Gas Prices Nearing Point Where Americans Cut Back

With about six weeks to go until the summer driving season begins, the price of a gallon of gasoline is just 18 cents away from the record price of $4.11, which was set in the summer of 2008.

The prices at the pump hit a national average of $3.83 a gallon on Monday, according to AAA. That’s close to the point where consumers say they will have to start cut back to pay their fuel expenses. This could adversely affect restaurants, malls, and entertainment venues that count on people driving to get there. Some analysts say it’s one reason the stock market has been struggling recently, including on Monday, when the Dow Jones Industrial Average fell 140.24 points to close at 12,201.59.

“I am sure the rising cost of energy is bothering the market,” says Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Ore. “I do think the uptick in gasoline prices will have an impact on consumer spending in the next few quarters.”

Perhaps, because gas prices have been rising for months, most Americans are not surprised. In a survey last month, the Gallup Organization found the average American expected the price of gasoline to peak this summer at $4.36 a gallon. Some 20 percent of respondents thought the price could go as high as $5 a gallon.

Nearly every spring, the price starts to climb as refiners shift over to their summer blends, which are more expensive to produce. On top of that, this spring has seen disruptions in the oil market because of the turmoil in Libya.

On Monday on the New York Mercantile Exchange, the price of oil fell $2.31 a barrel to $107.35, in part reflecting a move by China to try to slow its soaring economy.

According to Gallup's chief economist, Dennis Jacobe, the “psychological point” where people start to change their driving habits is $4 a gallon for gasoline – up from $3.50 a gallon in the past.

“At $4 a gallon, you get people who might have money to spend otherwise, but with the amount gasoline costs, they start to cut back in response to the price,” Mr. Jacobe says. “At $4 a gallon, they park the extra vehicle if they have two cars and use the most efficient one, and they make fewer trips. It really does have a subtle effect.”

According to AAA, six states now have gasoline prices above $4 a gallon. The highest price is in Hawaii, where fuel is $4.48 a gallon. That’s followed by California, where the price now averages $4.20 a gallon. In addition, three other states have prices averaging between $3.90 and $4.

Almost every year since 2000, the price of gasoline has risen an average of 52 cents a gallon between January and the summer peak, according to Jeff Lenard, a spokesman for the National Association of Convenience Stores in Alexandria, Va. The lowest rise was 20 cents a gallon in 2003, and the biggest was $1.13 a gallon in 2008. So far this year, the price is up 70 cents a gallon.

“Historically, the peak is usually right before Memorial Day,” says Mr. Lenard.

The rising prices are coming at a time when gasoline inventories have been falling, says Sandar Cohan, a principal at Energy Security Analysis Inc. in Wakefield, Mass. Gas inventories are now running at 23 days of available supplies, compared with 28 this winter. Last year at this time, they were at 24 days, which was also considered below normal.

Some of the low inventories are the result of refineries, especially on the East Coast, which have been taken off line for annual maintenance, Mr. Cohan says.

But that maintenance should be ending soon: Cohan expects the high gasoline prices will entice refiners to crank up production shortly.

After Memorial Day, the price of gasoline could collapse, Cohan worries. “There is a potential for a bubble,” he says. “If summer demand does not materialize, the gasoline price will collapse pretty quickly.”

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