Behind high oil and gas prices

LONDON (Fortune) -- All this week, the big factor behind rising oil prices has been the standoff between Britain and Iran over the fate of 15 British sailors seized by Iran in the Persian Gulf on March 23. But the steadily heightening tensions - British Prime minister Tony Blair now intends to take the matter to the UN Security Council - has camouflaged another factor likely to make this another long hot summer for American drivers even if the crisis is resolved and the sailors are eventually released.

No, we're not talking about Iran's unpredictable and eccentric leader, Mahmoud Ahmadinejad. Bad as he might be, our own surging demand for gasoline and diesel is also partly to blame for the run-up. Coupled with the approach of the summer driving and hurricane seasons, thirsty American drivers are likely to keep the oil markets roiling for months.

"Total product demand in the U.S. has been very strong," says Lehman Brothers chief energy economist Ed Morse. So far this year, demand for gasoline and diesel is up more than 500,000 barrels a day from a year ago, an increase of 2.6 percent.

That may not sound like much but it's a full percentage point more than the 1.6 percent to 1.8 percent annual growth rate that's been the average over the last 10 years. "It's a very large number, says Morse, adding that for the first time ever, gasoline demand topped 9 million barrels a day throughout January, which is usually a lower-demand period as Americans cut back on driving in the cold winter months. Diesel demand is up even more -- 14 percent - suggesting that the economy is actually growing faster than the official 2.5 percent rate. "I think there is pressure on gas prices for sure, even if the Iranian crisis eases," says Morse.

If all that weren't enough to bolster prices, demand for crude oil from the United States has actually been depressed in recent weeks by the current round of refinery downtime and maintenance now underway as oil companies shift refinery production from heating oil to gasoline. "There's about 25 percent more maintenance going on than we thought," says Morse. As those refineries come back online in April and May, he says, U.S. demand for crude oil will jump by roughly 2 million barrels a day.

Of course, Big Oil isn't complaining. While U.S. energy giants like Exxon (Charts) and Chevron (Charts) as well as BP (Charts) don't do business in Iran, they certainly stand to benefit from higher oil prices and refining margins. Indeed, the run-up in oil prices suggests that the fears of an oil patch profit crunch trumpeted by the Wall Street Journal and other observers last fall were overblown.

As usual, it's a good time to be in the oil business, even if drivers are getting pinched. If ever there were a time for Washington to push fuel conservation - and for ordinary Americans to embrace it - it's now.