Living with higher gas prices.

• Author: Kroll, Karen
• Position: Quick Study

As of mid-May, gas prices across the United States averaged just under $4 per gallon, up about $1.06 from a year earlier, the U.S. Energy Information Administration (EIA) reports. What's more, EIA's assessment of prices going forward shows little relief in sight.

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In its May 2011 Short-Term Energy Outlook, the agency predicts the average annual regular grade retail gasoline price will jump from $2.78 in 2010 to $3.63 for 2011, and to $3.66 in 2012.

Several shifts are driving prices up. Over the shorter term, unexpected outages at several refineries have cut into the U.S. supply, says James L. Williams, energy economist with WTRG Economics in London, Ark. The crisis in Libya has taken about one million barrels of oil off the market, reducing global spare capacity to about 3.5 million barrels per day; the average is about 4.5 million. That means world oil production is running north of 95 percent, Willliams says. "When you get capacity utilization near that level, prices rise."

Growing demand for oil throughout the world and with slowing growth in supply from non-OPEC countries also are contributing to a tightening of the oil markets, EIA says. Global demand is expected to inch up throughout 2011 to 89.4 million barrels per day, an increase of 3 percent from 2007, according to the International Energy Agency.

Business Responds

Unsure what the future of oil prices holds, executives with companies that consume large amounts of fuel are doing all they can to manage costs. C.R. England, one of the nation's largest refrigerated trucking companies, purchases about seven million gallons of fuel each month for its 3,700 tractors (the front part of the trucks) and its 5,700 trailers, says Corey England, executive vice president.

The Salt Lake City-based firm is attacking rising fuel prices on several fronts. For starters, most of its customer contracts allow C.R. England to adjust its charges based on the price of fuel. "Our fuel surcharge really functions as a hedge," England says.

However, C.R. England hasn't been able to include in its contracts a charge for the fuel it uses to refrigerate the products it is transporting, England says. To protect the firm against rising prices for that fuel, he will periodically purchase call options.

Looking a bit more broadly, England says management's "biggest fear is that rising fuel prices will dampen the economy," resulting in a drop in demand for the company's trucking services. So...