Cheaper gas: Enjoy it while it lasts

Demand eventually will increase price

September 12, 2006|By Paul Adams and Tyeesha Dixon | Paul Adams and Tyeesha Dixon,Sun reporters

The summer driving season is over, there's not a hurricane nearby and all is relatively calm for the moment in Lebanon and Iran, which has recently expressed a willingness to negotiate over its nuclear program.

It adds up to a 40-cent drop in Maryland gasoline prices over the past month, providing an unexpectedly happy ending to a summer that saw prices hover above $3 a gallon as geopolitical tensions and tropical weather worries roiled global energy markets.

And the news is likely to get better for motorists in the next several weeks.

Some oil industry analysts say prices could fall an additional 10 cents or more before leveling off at about $2.50 per gallon for regular unleaded. The Organization of Petroleum Exporting Countries added to the downward momentum yesterday by announcing that it would maintain current production levels. That news sent crude prices below $66 per barrel, a decline of roughly 16 percent from the all-time high reached in mid-July.

But analysts say motorists would be wise to curb their enthusiasm.

Global oil and gasoline supplies remain extremely tight as demand continues to climb - despite plunging truck and SUV sales in the United States. The market is increasingly being driven by economic growth in China, India and other rapidly developing countries, which have a rising thirst for oil. That, combined with continued uncertainties in the Middle East, will keep prices from staying low for long.

"It's good news as long as it lasts," said Nigel T. Gault, U.S. economist for Global Insight Inc., an economic analysis and forecasting firm based outside Boston. "We're not sure how long it's going to continue. We do see a risk of prices heading back up again later this year as we head into the winter months."

The average price for a gallon of regular unleaded gasoline was $2.673 in Maryland yesterday, according to motor club AAA, slightly higher than the national average of $2.624. A month ago, Marylanders were paying $3.077 per gallon. A year ago, gasoline cost $3.215 in Maryland as production disruptions caused by Hurricane Katrina sent prices to record levels in most of the country.

Still, motorists aren't exactly smiling over the recent prices.

"Now it's down to $2.69, but that's still too high," said Brian Buchner, a 36-year-old project manager from Annapolis.

Buchner spent more than $54 filling up his Dodge Durango at a BP station on Russell Street yesterday. He said it's nice to see prices coming down, but they are still high by historical standards.

Lois Allen, a Baltimore retiree, said the drop in prices isn't adding a fortune to her wallet.

"To tell you the truth, I don't really notice it," said Allen, who stopped for gas at a Texaco station on North Avenue, where regular unleaded was $2.55.

Analysts say consumers have either become accustomed to high prices or simply abandoned any hope of avoiding them. Despite prices above $3 per gallon throughout much of the summer, Americans continued to drive pretty much as usual.

The Energy Department reports that gasoline consumption was up 1.4 percent for August compared with August a year ago. That was slightly less than the historical average annual growth of about 1.5 percent to 2 percent.

The good news is that higher prices and continued strong demand inspired the industry to scramble to produce more gas, as well as to import record amounts from abroad, analysts said.

As of Sept. 1, the nation had 207 million barrels of gasoline in its inventory, about 3.5 percent more than usual for this time of year. Oil inventories are at their highest level since 1998, the Energy Department said, in part because oil rigs damaged by last year's hurricanes are coming back online and producing at peak levels.

The market typically sends prices lower after Labor Day, considered the end to the summer driving season and a return to normal demand. But the unusually high gas inventories combined with an easing of tensions in the Middle East resulted in the usual sell-off coming a month early this year, said Doug MacIntyre, a senior oil market analyst with the U.S. Energy Information Administration in Washington.

It was the exact opposite situation last year, when oil and gas supplies were disrupted by hurricanes in the Gulf of Mexico, McIntyre said.

"On the crude side, the lower prices are reflecting this sort of relatively rosy outlook for most of the world on oil," he said.

For much of the summer, energy markets built a "risk premium" into the price of oil and gasoline because of the war on the Israel-Lebanon border. Though neither country produces oil, some analysts feared that the fighting could spread to other parts of the Middle East. At the same time, Iran was threatening to close its oil fields if the West imposed economic sanctions over its nuclear program. Iran said Sunday that it is ready to consider complying with a U.N. Security Council demand that it freeze its enrichment of uranium.

With those crises heading toward resolution, analysts see crude prices continuing to fall this month, taking gasoline down, too. But experts say crude would have to fall by $20 to $30 per barrel for gasoline to drop below $2 per gallon. That's unlikely in a world where demand for oil continues to accelerate.

"Fundamentally, we're in a world where demand continues to grow, and its continued growth has been surprisingly strong in the face of high commodity prices," said Dave Pursell, a partner and industry analyst at Pickering Energy Partners in Houston, Texas.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.