Driving in the U.S. will probably become even more costly in the months ahead, since gasoline prices are likely to rise, even as overall U.S. gasoline demand drops.

The culprit is the price of oil, which accounts for about 60-65 percent of the cost of a gallon of gasoline, according to the U.S. Energy Information Administration. Oil, which rose $2.62 to $81.74 per barrel on Wednesday at mid-day, has soared 125 percent since plunging to about $35 per barrel last winter. Further, in the last six weeks alone, oil has jumped about 20 percent.
Meanwhile, U.S. gas prices, currently about $2.61 per gallon for regular unleaded, have erased a minor, early-autumn decline and are now approaching the 2009 high of $2.67 per gallon, according data compiled by gasbuddy.com. Since hitting a low of about $1.61 per gallon last winter, gas prices have surged about 60 percent.

What's driving oil higher? The likely U.S. and global economic recoveries and the weak dollar. The former means oil demand in key emerging market economies, particularly in China and India, is likely to increase in the quarters ahead, and since the developing world accounts for a disproportionate share of global oil demand increases, any signs of a quickening economic pulse in these countries puts upward pressure on oil prices.

As far as the dollar goes, institutional investors, many of whom have purchased oil as an inflation hedge, tend to pile into oil contracts as the dollar falls, pushing up its price. Other institutional investors are buying oil contracts as a long-term asset, calculating that its longer-term return will be high, and this, too, puts an upward pressure on oil.

However, although oil's price and the weak dollar account for the bulk of gasoline's latest vector toward $3 per gallon, they're not the only factors. A third factor is a lower gasoline supply in the United States. Refiners, who saw margins squeezed this year, have closed refineries as demand in the U.S dropped, due to the recession, The Wall Street Journal reports. What's more, gasoline consumption in the United States is likely to fall to about 17 million barrels per day (bpd) by 2020 from about 19 million bpd today.

The result is an unusual market phenomenon in which Americans are using substantially less gasoline, but are still paying more for it -- a trend that's likely to continue until oil prices moderate. In normal times, a pronounced recession in the U.S. and the loss of five to seven million U.S. drivers due to job lay-offs would result in a sustained drop in gasoline's price; but that hasn't been the case during the initial stage of the globalization era.

Analysis: A rising gasoline price is exactly what the U.S. economy does not need now, since it reduces Americans' disposable income. Disposable income has historically supported consumption, but consumption levels will clearly take another hit if gasoline prices continue to trek higher as budget-squeezed Americans cut-back discretionary purchases further in order to fill the gas tank. Add higher heating oil prices and the U.S. economy will encounter two headwinds that will weigh on GDP growth.

In the long-term, the American economy would benefit from increased vehicle efficiency and a move away from gasoline and diesel as primary fuels. Short-term, Congress could help with a one-time, sliding-scale, $200-300 federal income tax credit for gasoline purchases to help poor and working families cope with increased commuting costs. However, at this juncture, there's little support for it in Congress.

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