Gas prices exceed $3; US to tap oil reserves

Gasoline soared above $3 a gallon at many Boston-area service stations and around the country yesterday as the impact of Hurricane Katrina spread quickly from wholesale to retail markets, provoking complaints from motorists already straining after a summer of record-high prices.

With the devastating storm shutting down refineries and major pipelines along the Gulf Coast, spot market prices have surged more than 40 percent since Friday, closing at $2.64 in New York on Tuesday, according to the Energy Department. Retail prices have followed. AAA of Southern New England reported the price for self-serve regular unleaded reached as high as $3.35 a gallon in Massachusetts yesterday, with an average of $2.78.

''Within the next week, the average will be over $3 a gallon, and that will be the floor," said Art Kinsman, the AAA spokesman. ''The worst case, which is a major disruption to gasoline supplies, has been realized, and motorists are facing up to a month of really brutally high prices."

At gas stations around Boston, drivers were outraged to find prices had jumped 50 cents or more overnight.

''When did it turn $3?" a stunned Lawrence Ray of Marshfield said while filling his pickup at an Exxon station in Kingston, where regular unleaded was $3.35, up from about $2.70 Tuesday. ''I just want to flip out about it. I've got a $2,000-a-month mortgage. I get $100 phone bills. It's just too much money to live right now."

The Bush administration yesterday moved to contain spiking prices by boosting crude oil and gasoline supplies. The administration said it would release crude oil to refiners from the nation's 700-million-barrel Strategic Petroleum Reserve, and ease clean-air standards in all 50 states until at least Sept. 15 to allow faster refining.

Clean-air standards vary from state to state, requiring refiners to produce up to 250 different formulations of gasoline and diesel fuels to meet the varying requirements, said Gordon Klemp, a refined-fuel specialist at DTN, a commodities analysis firm in Omaha. With the standards waived, refiners will be able to produce fewer formulations and get the fuel to market faster, Klemp said. The measures are expected to help stabilize prices at the pump.

Speaking to the nation after surveying the destruction in New Orleans from Air Force One, President Bush said these measures would ''take some of the pressure off of gas prices." But, he added, ''Our citizens must understand this storm has disrupted the capacity to make gasoline and to distribute gasoline."

About half the nation's gasoline is refined in six Gulf states. Hurricane Katrina has at least temporarily knocked out more than 10 percent of the nation's refining capacity, as well as major pipelines. Yesterday, unleaded gasoline at one point traded at a record $2.92 a gallon on the New York futures market yesterday for delivery next month, before closing at $2.61, up nearly 70 cents from Friday, before Katrina veered into the Gulf.

Even before the hurricane hit, gasoline stocks had dwindled for nine consecutive weeks during a heavy summer driving season, pushing prices to record highs, the Energy Department reported yesterday. Refiners, meanwhile, have been operating at essentially full capacity, and are unable to make up for disruption in Louisiana.

Analysts at the federal Energy Information Agency said the higher wholesale prices of recent weeks had begun to work their way to the pump when the sudden supply disruption accelerated the increases.

''It typically takes two to four weeks for wholesale prices to translate to retail, but this is not a typical situation," said Doug MacIntyre, senior oil market analyst at the Energy Information Agency. ''There is no precedent for a storm like this."

Analysts said yesterday that prices have filtered to the retail level so quickly in part because the number of gas stations has declined. In Massachusetts, for example, the number of stations has dropped to about 2,600 from 3,200 a decade ago, according to the state Division of Standards.

That means many stations buy gas daily, and at recent steadily increasing prices.

Larry Ng owns a Gulf station in Wellesley, which on a good day can sell 6,000 gallons of gas, he said. A few days ago, he was selling regular for $2.73, but for the shipment of gas he received Tuesday, he paid $3.20 gallon wholesale. He raised his pump prices to $3.36 for a gallon of unleaded regular.

''Some people understand. Some people get mad," he said. ''It's a tough business."

Prices still vary widely, analysts said, depending on when stations last bought their gas from suppliers, and nearby competition. Kinsman, the AAA spokesman, said Massachusetts gas prices varied from $2.53 to $3.35 a gallon, an 82-cent spread -- the largest ever in AAA's statewide surveys.

Many analysts expected the high prices to ease somewhat in coming months as the summer driving season ends, reducing demand, and at least some refineries knocked out by the storm resume operations, boosting supplies.

But after months of steadily rising gas prices squeezing consumers, the sudden supply shock is likely to take a toll on the economy as households curtail other spending to absorb the dramatic price increases. Adjusted for inflation, gas prices are now approaching the all-time high reached after the supply shocks following the Iranian Revolution in 1979.

Yesterday, officials of the Federal Reserve and the Bush administration said the economy, which has been expanding at a solid rate, is strong enough to absorb the shock. Still, some economists said yesterday that the Fed, which has approved 10 consecutive interest rate increases in a little more than a year, may pause in its tightening campaign while it assesses the extent of damage to the economy.

Under a best-case scenario, said Nariman Behravesh, chief economist at Global Insight, a Waltham forecasting firm, gas prices will stay above $3 gallon over the next several weeks, and cut as much as 1 percentage point from the economy's growth rate.

Worst case: Oil soars to $100 a barrel, gas prices hit and stay at $3.50 a gallon for several months, and the economy teeters on the brink of recession.

''What you have now is a supply shock. It's no longer just demand and prices booming," he said. ''The pain threshold is going to rise."

Bruce Mohl of the Globe staff, correspondent Megan McKee, and Globe wire services contributed to this report. Robert Gavin can be reached at rgavin@globe.com; Chris Reidy at reidy@globe.com.