Midwest Gas Prices May Pull Past State’s

The Energy Department on Tuesday raised its forecast of average summer gas prices to $1.50 a gallon because of higher oil prices and tighter gasoline supplies in the Midwest, which has dethroned California as the nation’s priciest gasoline market.

The monthly average price for retail self-service regular gasoline will peak in July at $1.55 a gallon, according to a report released by the Energy Information Administration, the Energy Department’s statistical arm.

Predicting the price of gasoline, particularly in summer, is difficult, and the EIA has revised its summer forecast several times. In March, the agency warned that summer gas could top $1.80 a gallon because of high oil prices, but it revised that forecast down to a range of $1.40 to $1.45 a gallon after the Organization of Petroleum Exporting Countries decided to increase oil production as of April 1.

“At the time, it seemed that the driving season’s peak prices were behind us. Declining pump prices were projected for the remainder of the year. However, this optimism turned out to be short-lived,” the EIA said in its monthly energy forecast.

Oil prices initially fell about $4 a barrel, but that drop now appears to have been an overcorrection, as current, higher prices are more in line with world oil market fundamentals, the EIA said. Light sweet crude oil for July delivery rose 5 cents to settle at $29.75 a barrel Tuesday on the New York Mercantile Exchange.

In addition, tight supplies of a new, reformulated gasoline in the Midwest have caused localized price spikes, the EIA said. Since June 1, about one-third of the gasoline sold in the United States must meet tougher clean-air standards. Refiners are having trouble making enough of the new gas.

California has required a cleaner-burning gasoline since 1996 and, as a result, has consistently been one of the most expensive gas markets in the nation.

But lately, the Midwest has claimed that title. Gas is selling for more than $2 a gallon at some stations. California motorists have been paying about $1.61 a gallon on average for regular self-service gasoline in the last few weeks.

The U.S. average for regular gasoline is $1.56, the EIA said Monday, based on its weekly survey of 800 gasoline stations.

Gasoline marketers are protesting the new standards, contending that low supplies of clean-burning gasoline in Chicago and Milwaukee are boosting prices and undermining the Environmental Protection Agency’s clean-air efforts.

Gasoline in Chicago, one of the many U.S. cities where the reformulated blend is required, costs an average $1.98 a gallon. Prices just outside Chicago, where conventional gasoline is allowed, are 30 cents lower, according to AAA, the automobile association.

“Our members have reported that . . . sales have been diverted to stores outside the [reformulated-gas zones], which means that conventional gasoline, while not being sold in the reformulated-gasoline areas, is being consumed there,” John Huber, president of the Petroleum Marketers Assn. of America, wrote in a letter to the EPA and the Energy Department.

“Thus, some of the benefits of reformulated gasoline are lost when prices get too high.”

The pricing picture is further complicated by patents on reformulated gasoline held by El Segundo-based Unocal Corp. The patents, which were upheld in March by a federal appeals court, have discouraged some refiners from producing the cleaner-burning fuel to avoid potential royalty payments.

A U.S. district court jury in 1997 awarded damages of 5.75 cents a gallon after ruling that six refiners had infringed on the patent in California. Unocal Chairman and Chief Executive Roger C. Beach has said the patents “may have application throughout the United States.”

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Reuters news service contributed to this report.