While fuel prices have reached record-setting highs nationwide, even stiffer prices confront Illinois consumers and businesses because of the state’s high taxes and the high cost of reformulated gasoline.

There are numerous contributing factors as to why fuel prices have increased so drastically in the past year. Everything from higher crude oil prices and environmental initiatives to refinery problems and the average weight of Americans has contributed to paying more at the pump.

But like most things, it comes down to a case of supply and demand.

“Right now the supply is down and the demand is high,” said Nicole Niemi, a spokesperson for AAA-Chicago Motor Club. “We are at 95 percent capacity right now.”

It is no coincidence that 2006 was the highest travel year on record and also set records for fuel prices in the U.S., said Niemi. But even as production has increased, it has not caught up with consumer demand, which has reached higher levels than usual even before Memorial Day.

“Production is more than it ever has been before at U.S. refineries, but demand is up more than ever before” said David Sykuta, executive director of the Illinois Petroleum Council. “Illinois is up 3 percent in demand when it is usually up 1 percent. Year to date we have produced 8.85 billion gallons of fuel a day.”

In reaction to this increased demand and shortened supply, crude oil prices have gone up swiftly in last six months by around $15. Now crude oil sells in the mid $60s per barrel, whereas it was at $50 a barrel before.

“One of the main problems is that we float with the world price,” said Sykuta. “We produce 40 percent of our fuel and have to import 60 percent. We need to find more sources of fuel within our country to really bring down prices. The problem with that is that it always brings up environmental issues.”

Sykuta was referring to the controversial debate as to whether drilling at the Artic National Wildlife Refuge in Alaska would be beneficial or not.

Refiners have also suffered recently as “glitches” at refineries in the Midwest have caused a few to shut down for a small period of time, which has a large effect on oil production, said Sykuta.

And with rapidly industrializing India and China consuming more than ever before—much reminiscent of the U.S. in the 1950s—and with the seasonal implementation of environmentally friendly but more costly summer blends, it is a sure recipe for increased prices.

Yet while the entire nation is feeling a punch, if not a pinch, at the pump in Illinois consumers bear a somewhat greater burden because of state tax laws.

Illinois high taxes

“It’s the dirty little secret of the state,” said Sykuta. “When prices go up it is actually a huge windfall in revenue for the government.”

Every state has to pay a federal and state tax on each gallon of gasoline. The federal tax is a fixed rate at 18.4 cents per gallon. Similarly, each state has a gas tax that it determines on its own. This tax does not fluctuate either. In Illinois the tax is at 19 cents per gallon, which Sykuta said is middle of the road when in comparison to other states.

However, where Illinois becomes a bit more expensive for consumers is in the sales taxes and home rule taxes that most states do not have.

“Most states end at the state and federal tax, but in Illinois that is just where we begin,” said Sykuta. “Illinois is one of only nine states that charges a sales tax on gas and it is a big one. There is a 5 percent sales tax and then there are three little taxes after that and then Illinois has a home-rule law which allows cities to put more taxes on.”

Sykuta said that the sales tax and three small additional taxes end up being around 6 1/4 percent added onto the final sale, while the home rule taxes vary from town to town, with Chicago the most onerous at 9 percent. Those taxes all fluctuate with price.

In comparison, consumers in Illinois often pay 30-40 cents more per gallon than the majority of states, said Sykuta.

With costs like this not only have consumers felt the crunch but also have businesses, many of which have been forced to pass some of the money onto consumers in a surcharge, even while escalating costs still eat into their profits.

Businesses feel the pressure

“When fuel prices go up it is a huge impact on us,” said John Puscheck, president of Prager Moving and Storage Co. in Naperville. “All signs would tell us to increase our rates, but we need to remain competitive. We can’t always do this. At the same time, the marketplace can’t continue to absorb the increase.”

Puscheck said that state laws prohibit his company from adding surcharges to intrastate moves, but they do initiate one for interstate moves.

The majority of trucks run on diesel fuel, and while it has not suffered the huge increases of regular gas, it has increased much over the past few years.

One of the methods Puscheck has used to mitigate fuel price increases has been to invest in $7,000 generators for his long-distance trucks that will heat the truck at night so the driver won’t keep the motor running. With the price of fuel where it is, the cost is usually made up quickly.

Marty Olliges, operating manger for Silver Fox Limousine in St. Charles, has initiated the highest surcharge in the company’s history. The company usually has a $1 surcharge for gasoline, but has recently pushed it as high as $6.

“It is difficult to maintain a high level of profitability right now,” said Olliges.

Shipping giant UPS has seen a dramatic change in cost as well.

“Our fuel cost for 2006 was $2.65 billion,” said Susan Rosenberg, a spokesperson for UPS. “The year before that it was $2.1 billion. We saw a 20 percent increase. From 2004 to 2005 we saw a 47 percent increase.”

Rosenberg said that 5.5 percent of the company’s costs are in fuel. UPS has introduced hybrid trucks to its fleet and some even run on compressed natural gas to alleviate gas dependency. UPS even goes as far as planning routes that allow drivers to take the maximum amount of right turns possible to avoid idling in traffic. It also has developed new landing methods for its aircraft that conserve fuel.

“Right now we have a 4 percent surcharge on ground transportation and an 11 percent charge on air,” said Rosenberg.

Prices impact agency budgets

Transportation agencies like Pace have learned to deal with higher gas prices as well. The bus service budgets for fuel a year in advance and due to increasing fuel prices has had to allocate more each year for gas to run its 650 buses.

“We budgeted for $2.50 a gallon this year,” said Thomas J. Ross, executive director of Pace. “We have to allocate more of our budget each year for fuel.”

Pace does not pay taxes on the fuel it purchases and has experimented with buying bulk in advance, but it has only come out on top when doing that one time, said Ross. Instead it buys a surplus at lower cost in the winter when prices are low and then uses the excess fuel in the summer when prices are higher.

The irony is that it would make sense that people would want to take the bus when fuel prices increase, but because Pace is spending more money on gas it is unable to provide increased services or even more advertising, said Ross.

“We have not been able to increase our advertising budget since 1998 because that money has gone to fuel costs,” said Ross. “We can’t put any more services out there to meet any kind of growing demand.”

Ten percent of Pace’s fuel is a soy-based product bought at a fixed rate; it also has added new buses to its fleet that frequently get 20 percent better gas mileage than older models.

The question that hovers over the economy right now is what will the fuel industry do this summer in both supply and price. Organizations like AAA don’t give fuel forecasts because too many unpredictable factors, like the approaching hurricane season, can wipe out any predictions.

However, there are some current signs that could point to relief.

Relief in sight?

“The U.S. Department of Energy has recently expanded inventory for the first time in 13 weeks,” said AAA’s Niemi. “It has increased it by 400,000 barrels. Hopefully this will help catch up with demand.”

Sluggish refineries back on line will also help catch up with demand, said the Petroleum Council’s Sykuta.

“Some of the refineries that were down are now coming back on line and supply will get better,” said Sykuta. “If everything stays the same, prices should go down.”

But even then, prices will still appear somewhat high to Americans. And while many may begin to feel it in their pocket books there is a silver lining on the horizon for some.

Many believe that this is the wakeup call that the country needs to further explore alternative methods of fuel and transportation habits in the future.

Pace has already seen a jump in unique visitors to its Web site. In April 2006 it had 51,000, while in April 2007 it jumped up to 71,000. Ross sees this as a sign that many are exploring other options.

And while experts agree that petroleum will dominate our transportation needs in the immediate future this is a clear sign that the future will yield another source of energy.

The U.S. does not produce enough alternative sources of fuel now to significantly affect the market, but it is leading that way for the next generation, said the Petroleum Council’s Sykuta.

“Change comes slowly and there is no silver bullet in this situation,” said Sykuta. “The silver lining is that this is making people more aware of alternative fuels, but we can’t believe that this change will come next year. We will work with gasoline for the next 40-50 years.”