Sticker shock at the pump: terrorism fears and rising demand have pushed gas prices higher. But is gas really as expensive as it seems?

• Author: Hakim, Danny
• Position: The Economy

Two dollars for a gallon of gas? "It's ridiculous," says Abby Lochotzki, 22, a student at Eastern Michigan University. "Outrageous," says Kashania Thrower, also 22, who works at a drug rehab center.

Refueling their cars in Ypsilanti, Mich., the pair reflects the frustration many Americans feel over gas prices, which averaged a record $2 per gallon in June 44 percent higher than the $1.40 average a year earlier.

While economists worry that higher gas prices could slow the economic recovery, the campaigns of George W. Bush and John Kerry have been arguing over who's to blame--even though factors beyond either party's control are likely to keep fuel prices higher than in the 1990s.

Fear that production could be cut--by terrorist attacks on oil facilities in Saudi Arabia, additional attacks on facilities in Iraq, or unrest in Nigeria and Venezuela--is a key factor. Economists say the $40 price of a barrel of oil includes a "fear premium" of as much as $10 a barrel.

HIGHER DEMAND

Demand for oil is also on the rise, with world consumption expected to total 81 million barrels a day this year, 2 million more than in 2003.

Much of the increased demand comes from China and the U.S., where robust growth is boosting consumption. Another factor in the U.S.: The cheap gas of the 1990s stalled what had been a...