Laissez-Faire My Gas Guzzler, Already

September 7, 2004

 By SIMON ROMERO

"I don't like gas being this expensive," said Paul Kaesberg, an

oncologist at the University of Wisconsin Hospital and Clinics in

Madison who routinely pays $1.90 a gallon. "My driving isintegral to my

job, it's integral to my pleasure in life. I won't cut back onthat. I

might cut back on other things."

Dr. Kaesberg, whose 2004 Acura sport utility vehicle gets 18miles to

the gallon, is typical of consumers who started the summer withthe

shock of $2 a gallon gas, but resolutely kept driving. Eventhough oil

prices have increased 30 percent in the last year, the nation'sgusto

for gasoline has not been shaken.

Over the Labor Day weekend, for example, about 28.7 million ofthe 34.1

million Americans traveling more than 50 miles from home wereexpected

to be driving, a 2 percent increase from last year, according toAAA,

formerly known as the Automobile Association of America.

The economy, of course, has felt an impact from higher energyprices.

Many companies, including airlines and trucking fleets, havestarted

tacking on surcharges to

compensate for higher fuel costs for their services, effectivelypassing

on the costs to consumers. That, in turn, has contributed tospurts of

inflation over the

summer. Manufacturers and retailers say higher energy costsremain a

threat, even as manufacturing activity remains somewhat robust.

Some symbolic shifts in buying practices have also cropped up.Consumers

are buying fewer Hummers while sales of hybrid vehicles areclimbing;

recreational boaters are opting to share their boats with friends

instead of using two small vessels for an outing. But for themost part,

Americans are not altering their fuel-consumption habits as theypay

some of the highest prices ever for gasoline.

Purchases of items other than fuel do appear to be weakening,however, a

familiar development during periods of rising energy prices. On

Thursday, retailers reported

weaker-than-expected sales in August, with sales rising just 1percent

in the month, as companies including Wal-Mart warned thatearnings would

fall short of expectations.

Still, such figures suggest that Americans are forgoing purchasesof

everyday items so that they can continue to drive as much aspossible.

The four-week average for gasoline demand for the week ended Aug.27 was

9.421 million barrels, essentially unchanged from the period ayear ago,

according to the Energy Information Administration.

Part of the explanation is because gasoline prices actuallydeclined

during the summer, to a national average of about $1.86 a gallon,from a

record of $2.05 in May, while frenzied trading in financialmarkets

pushed the price for a barrel of oil to nearly $50 from $40. (Theprice

of crude oil is still far from its inflation-adjusted peak ofabout $80

reached in 1980.) That is because refineries in the United States

produced ample amounts of gasoline in the

last three months, meeting demand from consumers even asspeculators

placed bets on future swings in the price of oil that may havehad

little to do with actual petroleum

supplies.

"I don't think we're going back to $50 without a big supplydisruption

somewhere," said Juha Laiho, a Houston-based oil trader forFortum, a

Finnish oil company. "It's logical for

gasoline to pull back a bit."

Of course, gasoline at $1.86 a gallon remains about 10 cents agallon

more expensive than at this time last year, according to theEnergy

Information Administration, crimping many drivers. Still, itwould have

to become much more expensive to instill a big change in drivinghabits.

Rebecca Lindland, a senior analyst for the automotive industry atGlobal

Insight, estimates that gasoline prices would have to climb to a

nationwide average of $3 a gallon for at least six months toalter

consumer behavior.

"Gasoline is still incredibly affordable," Ms. Lindland said."Even with

inflation it's not much more expensive than it was five yearsago."

Some consumers are feeling the pinch, however. Michael McMillan,a

firefighter in Los Angeles who makes the 104-mile round-tripcommute

three days a week from his home

in Mission Viejo, Calif., said the price of gasoline was behindhis

decision to trade a Mitsubishi Montero sport utility vehicle fora

Volkswagen Jetta, which gets almost

double the gas mileage.

"I was really looking for something more economical for thedrive," Mr.

McMillan, 38, said. But judging from the parking lot at hisstation, he

said: "You'd think there are

no gas problems at all. You have a half dozen-plus jacked-uptrucks back

there on steroids."

Seeking out energy-efficient vehicles still seems to be theexception

rather than the rule. Sales of recreational vehicles, forinstance,

climbed 14 percent in the first half of the year from the periodin 2003

and rental reservations for the vehicles made in the early summerwere

up 34 percent from last year, according to the Recreation Vehicle

Dealers Association in Fairfax, Va.

"People work too hard to let even $50 extra in gas prices stopthem from

taking their vacations," said Phil Ingrassia, a spokesman for the

association.

At convenience stores, which sell about 75 percent of thenation's

gasoline, consumers are using credit cards for about 60 percentof fuel

purchases, a 20 percent jump from last year, according to theNational

Association of Convenience Stores. Jay Ricker, who owns 31convenience

stores in northeastern Indiana, said he had seen little impact on

purchases in his stores because of higher gasoline prices.

"There's a lot of grumbling, of course, but unless the price getsto

$3.50 a gallon behavior won't change," said Mr. Ricker, who addedthat

he preferred lower gas prices so customers could continue buying

higher-margin products at his stores. Gasoline in Indiana nowcosts

about $1.75 a gallon.

Some parts of the economy that depend heavily on oil are having ahard

time. Airlines, for example, are struggling to find ways to cutfuel

expenses that are expected to cost them $6 billion more this yearthan

last year. Airlines are doing everything from taxiing out to therunway

on one engine to cutting the amount of reserve fuel they keep on

aircraft in case of delays.

American Airlines, a unit of AMR, said its fuel expenses would be$1

billion more this year than it expected, and $300 million more inthe

third quarter alone, a reason why it is joining NorthwestAirlines in

charging passengers $5 a ticket for trips booked through its

reservations agents and $10 for those bought at airports.American said

that would raise $25 million in revenue, hardly a dent in itsfuel bill.

Fierce competition among airlines, however, has prevented thecompanies

from making fuel surcharges stick through ticket price increases.Some

low-fare carriers, including JetBlue Airlines, are betterprotected from

rising fuel costs. David Neeleman, JetBlue's chief executive,told

analysts this summer that the airline expected to cut its costsper

available seat mile about 2 percent in the third quarter, evenwith

higher fuel prices. That is because JetBlue hedged about 75percent of

its fuel purchases for this year.

While certain areas of the economy seek to adapt to higher energycosts,

such efforts are lost on most drivers. Julie Battistelli, 51, anurse

from Saugus, Mass., said she shunned public transportation,preferring

instead to drive a BMW sport-utility vehicle acquired in Aprilthat

costs about $10 a day in gasoline. "I have to have a car; I havea

little girl I have to drive everywhere," Ms. Battistelli said."In the

suburbs you have to drive."

Reporting for this article was contributed by Micheline Maynardin

Detroit, Katie Zezima in Boston, Aaron Nathans in Madison, Wis.,and

Chris Dixon in Los Angeles.