Drivers have seen gas pump prices jump by nearly a dime a gallon in the past week because of a rally in prices for oil and corn, from which the gas additive ethanol is made.
The national average for a gallon of regular gasoline was $2.811 on Tuesday, according to AAA, Wright Express and Oil Price Information Service. That's almost 8 cents more than a week ago and nearly 33 cents more than a year ago.
Yet, the price hike is probably temporary because traders will have a difficult time ignoring fundamentals: demand has fallen, supplies are plentiful and consumers are holding on to their cash as they continue to worry about the economy, said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service.
"I think we're going to top out pretty close to where we are," he said. "There will be a bias for gasoline prices to come off a little bit."
Pump prices began to climb last week as traders bought more oil as the dollar grew weaker against other currencies. Since oil is priced in dollars, it becomes more attractive to investors with foreign currencies when the dollar falls. In addition, the price of corn — used to make ethanol — has hit two-year highs because of worries about tight global supplies.
Oil prices retreated for a second day Tuesday as the dollar grew stronger and traders looked for more signs of what the Federal Reserve will do to stimulate the economy. Benchmark crude for November delivery fell 48 cents to $81.73 in midday trading on the New York Mercantile Exchange.
Walter Zimmerman, chief technical analyst at the brokerage and analysis firm ICAP, says the two most important factors affecting energy prices are the stock market and the dollar. "It's a very, very dramatic impact," he said. "If the dollar goes down, energy prices will go up regardless of anything else. It costs the average American every time they fill up their tanks."
Later Tuesday the Fed is expected to release details of its September meeting. At that time the Fed indicated it was ready to help jump-start the stagnant economy, though it provided few details.
Kloza and other analysts believe the price of oil already reflects whatever action the Fed may take, since traders began speculating about the Fed's plans immediately after the September meeting.
Stocks lost some ground on Tuesday. The Dow Jones Industrial Average was down about 30 points at midday. The NASDAQ was a little higher, the S&P 500 slightly lower.
The price of oil will also be influenced by expectations that OPEC will hold production at current levels and indications from several of the group's oil ministers that they are comfortable with crude prices between $70 and $80 a barrel. The Organization of the Petroleum Exporting Countries said the world economy continues to expand at below-average levels. OPEC is scheduled to meet Thursday in Vienna to discuss its official policy.
In other Nymex trading in November contracts, heating oil fell 1.70 cents to $2.2620 a gallon, gasoline dropped 3.75 cents to $2.1280 a gallon and natural gas lost 4.1 cents at $3.560 per 1,000 cubic feet.
In London, Brent crude fell 33 cents to $83.39 a barrel on the ICE Futures exchange.
Associated Press writers Jonathan Fahey in New York, Barry Hatton in Lisbon, Portugal, and Alex Kennedy in Singapore contributed to this report.