Cost of crude oil is key to keeping gas price low

The Outlook

Supply outpaces demand, and drivers reap benefit

January 17, 1999|By Ted Shelsby

GASOLINE prices are continuing to drop as supply outpaces demand. Last week, the Lundberg Survey of 10,000 stations nationwide reported the average price for self-serve regular fuel was 96.95 cents per gallon while the average of all grades was $1.03 -- below the all-time low of nearly $1.04, adjusted for inflation, reached last month.

Crude oil prices, while still near rock-bottom, increased somewhat in the past few weeks, and that pushed up wholesale gas costs in some areas, mainly in the Midwest. However, many dealers didn't pass the increases on to customers.

Have gasoline prices bottomed? Is there anything on the horizon that would send pump prices up?

Trilby Lundberg

Editor, Lundberg Letter

The average U.S. price of self-serve regular gasoline fell one-half a cent in the three weeks between our Dec. 18 survey and Jan. 8 survey. It was 96.95 cents last week. This is the lowest price in the history of the gasoline market, taking inflation into account.

What gas station prices do in the future will depend most of all on what crude oil prices do.

So far we have not had the kind of winter weather that would create an extreme rise in heating oil demand, which would impact the price of crude oil and push gasoline prices up. I don't know what Mother Nature will dish out later this winter, but there are no immediate indications, whether they be disasters in the world affecting supply of crude or a quick return to robust demand for oil in Asia, that will impact crude oil prices in the near future.

As of this time, I don't seen any sizable cutbacks on the part of major producers, such as some of the OPEC producers. None of these things are on the immediate horizon. Therefore, continued price weakness is what we expect.

That doesn't tell us it won't go up a 10th of a cent or down a 10th of a cent. We don't know what the thousands of dealers across the country will do regarding pricing.

But continued price weakness, in a period where we have the lowest consumer prices we have ever had, seems most likely because of an absence of the important factors that might turn it around and create a strong upward price trend.

Edward Maran

Oil analyst, A. G. Edwards & Sons Inc.

I would expect for the next few months that oil prices and gasoline prices will be pretty flat.

Oil prices have stabilized at about $12 a barrel, give or take a dollar, and prevailing margins are probably not going to change enough to make a big difference in what consumers pay for gasoline at the pumps.

The big thing that could change all of this would be OPEC coming together and reaching some sort of agreement. If that happens, gas prices could go back up. If we were to have oil prices, say in the $17-a-barrel range, then we could have a 12 cents to 15 cents move upward in the price of gasoline.

But that would take a major OPEC agreement. I'm not sure this will happen.

I think OPEC learned in the late 1970s that it was against their own best interests to try to keep oil prices too high, because it started to encourage a huge amount of development outside of OPEC. So they gave up on trying to keep oil at the $30-a-barrel level.

What we have right now is something that is pretty abnormal. Over the last 10 years, oil prices, for the most part, have ranged between $17 and $22 a barrel. Now we are down to $12 a barrel.

OPEC is very ineffective if they try to move the oil price above the $22 per barrel level, but if they try to get an agreement to get oil prices back to the $17 range they could be very effective. That would not have any impact on the outside oil companies. It would not stimulate investments or developing alteratives to OPEC.

Joel Fischer

Oil analyst, Burnham Securities Inc.

If gasoline prices aren't at the bottom, they have got to be close to the bottom.

There is a potential for crude prices to go up about $1 from their current rock-bottom levels. But that would mean only a 2-cents-a-gallon increase at the gas pumps.

I don't seen any major forces that would start pushing gasoline prices back up to where they were a year ago. That would take some major catastrophic surprise, like Iraq attacking Kuwait once again. In that part of the world nothing is impossible.

I don't think gasoline prices will go lower, much lower, unless the price of crude cracks open, and that is not likely.

If prices do drop, we will probably see the government step in and raise the excise tax on gasoline and push them back up again.

But there is something happening in the industry that has been underestimated in the general press, which focuses too much on OPEC. It has to do with oil production in non-OPEC areas, the United States for example.

People are shutting down production. At these prices it doesn't make sense to keep some of this country's higher-cost oil production fields operating.

Companies are shutting down production at some older oil fields in the U.S., Canada and even in the North Sea.

These things add up to a decline in production. While they may not put a lot of pressure on gasoline prices to rise, they are not going to cause pump prices to drop.

Pub Date: 1/17/99

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