This has been the topic of discussion many of our blogs as of late. It is very odd that many of us at very different stages have been getting the same message. I've been blogging since '08 and have 650 some posts....almost all with pictures...and some new bloggers have been getting the same message. VERY ODD. When I checked mine..it said it was only at 63% capacity. Go figure?!?! I can still post pictures if the images are small enough. I go to Microsoft picture manager and change mine to web large...and have been able to post them. Below a certain size & it does not count against your usage.
I was going to say, I downloaded a free resizer and then I resize all my pictures for everything on the web
Same thing happened to me, and I decided to pay the fee. If you go to my most recent post (http://missyoungsartroom.blogspot.com/2012/11/unhappy-with-blogger.html) there are some very helpful comments that will be able to help you. Also see "Draw the Line At"'s most recent post (http://drawthelineat.blogspot.com/2012/11/photobucket-and-blogger-tutorial.html) for a tutorial on how to use photobucket to upload for free. Good luck!
Most photo storage isn't free...but the benefit of blogger is that they give you quite alot of free storage. You may want to reduce the size of your photos though to maximize this benefit. If you are uploading large files, you are wasting your storage space. Reduce your file sizes to about 600 px and you should be able to get more storage. And yes, free storage sites like Photobucket, etc, will offer some storage, but that has a capacity as well. Hope this helps!