Energy Department expects gas prices to peak at $3.60 a gallon this spring, curbing demand

NEW YORK " Retail gas prices will peak near $3.60 a gallon in June, but prices at such lofty levels will make many Americans think twice about hitting the road this summer, the Energy Department said Tuesday.

High prices and a weak economy are expected to cut demand for gasoline by about 0.4 percent during the peak summer driving season, the department's Energy Information Administration said in a monthly report on petroleum supplies and demand. Overall consumption of petroleum products will drop by 90,000 barrels a day this year. Previously, the EIA had projected petroleum consumption would rise by 40,000 barrels a day.

The government had previously estimated that gas prices would peak near $3.50 a gallon. Many analysts predict prices will rise higher than the EIA's latest estimate, and approach $4 a gallon.

On Tuesday, gas prices slipped slightly to a national average of $3.331 a gallon from Monday's record of $3.339, according to AAA and the Oil Price Information Service. Prices are 55 cents higher than a year ago.

Diesel prices, which are already averaging more than $4 a gallon nationwide, will average $3.62 a gallon this year, up 74 cents from 2007, the EIA said. Diesel fuel is used to transport the vast majority of the world's food, consumer and industrial products. High diesel prices are one of the reasons food prices are soaring.

Crude oil prices are the biggest reason gas and diesel prices are rising, the EIA said. Oil is now expected to average $101 a barrel this year, up from the EIA's previous projection of $94. Next year, the EIA expects oil to average $92.50 a barrel, up from a previous projection of $86.

While high prices are damping demand in the U.S., petroleum consumption remains strong in China, India, Russia and the Middle East, the EIA said.

"The combination of rising world oil consumption and low surplus production capacity is putting upward pressure on oil prices," the EIA report said. "The flow of investment money into commodities has contributed to crude oil price volatility."

Indeed, the EIA acknowledged "significant uncertainty" in its oil price projections, noting that unexpected supply disruptions due to conflict in oil-producing nations, unusual weather or refinery outages could send prices spiraling sharply higher.

"Prices can fall as rapidly under a different set of circumstances, such as easing of geopolitical tensions or further weakening of U.S. and world economic growth," the EIA's report said.

The EIA report underscored the difficulties refiners are facing, despite high gas prices. Refiners have to buy the crude they process into fuel. But falling demand for gasoline prevents refiners from raising gas prices enough to keep up with the soaring price of crude.

"These projections indicate a narrowing of the difference between the gasoline retail price and the average cost of crude oil," EIA said.

The EIA also projected that OPEC oil production will average 32.3 million barrels a day this year, up about 100,000 barrels a day from previous forecasts.