Industry Research

Gas Prices Rise As Oil Companies Prep for Return in Demand

Posted on January 7, 2009 by LCT Staff - Also by this author - About the author

NEW YORK CITY – Gasoline prices rose for the sixth straight day Monday, according to a nationwide survey of gas station credit card swipes – a sign that oil companies expect higher demand later this year.

The price of regular unleaded rose 1.4 cents to a national average of $1.672 a gallon, motorist group AAA reported.

Rising prices at this time of year are a sign that oil companies are preparing for an increase in demand in the spring and summer, according to Jason Toews, co-founder of, a service that lets motorists post local fuel prices online.

Oil companies "don't like to shock us," said Toews. "They like to ease us in to higher prices."

If prices rise too quickly, it could cause a dramatic drop in demand, he added.

Gas prices have fallen since last summer as the economy slowed and Americans cut back on driving.

Americans drove 100 billion fewer miles during the 12-month period between November 2007 and October 2008 compared with the previous year, according to the U.S. Department of Transportation.

Gas consumption was down 3.2% in 2008 when compared to a similar length of time in 2007, according to the MasterCard Spending Pulse report, which tracks national retail sales.

For the week ended Dec. 26, U.S. gas consumption fell by 2.9%, according to data from the MasterCard Spending Pulse report.

"We're still not at a point where people are using more (gas) than a year ago, but the declines are not as great," said Doug MacIntyre, senior oil market analyst at the Energy Department.

Gasoline use has not seen a year-over-year increase since April 18, according to MacIntyre.

Monday's average price was down 7.9 cents from $1.751 a gallon a month ago, and down more than $1.40 from $3.104 a year ago. Gas prices have plummeted from a record average of $4.114 a gallon reached in July.

While $4-a-gallon gas will probably not reappear any time soon, according to Toews, if demand picks up, prices could reach $2.75 by the summer.

Economy: Fuel consumption remains low compared to a year ago, but that could change if the economy turns around, said Chris Lafakis, associate economist with Moody's

There is a lot of hope the economy will start to stabilize after the next presidential administration takes office, according to Lafakis. There are "expectations that the new administration will be able to revive the economy with a large stimulus package," said Lafakis. President-elect Barack Obama, who takes the oath of office on Jan. 20, is expected to push Congress for an economic stimulus package that could cost between $675 billion and $775 billion.

Crude oil: Gas prices are rising with the price of crude oil, which is the main ingredient in gas and accounts for more than half the price of a gallon of gasoline.

Falling oil prices, which helped drive gas below $1.50 in some states, have started to bottom out.

"Crude oil can only go so far," said Toews.

After topping out at more than $100 a barrel in July, oil hit a four-year low of $32.40 a barrel on Dec. 19. Prices have since eased up to $47 a barrel on Monday.

State prices: Prices remained above $2 a gallon on average in only two states on Monday: Alaska, at $2.503, and Hawaii. at $2.29. Gas was cheapest in Montana at $1.467 a gallon on average, and sold for less than $1.50 on average in three states.

Out of the major U.S. cities, Anchorage, Ala., has the highest average gas prices, at $2.34 a gallon, according to Salt Lake City has the lowest average, at $1.381.

Diesel: The price of diesel fuel, which is used in most trucks and commercial vehicles, fell 0.6 cents to an average of $2.402 on Monday. Despite the decline in diesel prices from a record high of $4.845 a gallon last summer, the economy continues to weigh on consumption from the trucking industry, according to Bob Costello, chief economist with the American Trucking Associations.

"Demand is not back, and the reason it's not back is freight volumes are so low," he said.

Because of diesel's role in shipping and transport, diesel prices can also affect the prices of other goods.

Ethanol: The price of E85, an 85% ethanol blend made primarily from corn, jumped 4.8 cents to an average of $1.533 a gallon in Friday's survey, according to AAA.

E85 can be used in place of regular gas in specially configured "flex-fuel" vehicles, but it is not readily available in some states. The AAA figures are statewide averages based on credit card swipes at up to 100,000 service stations across the nation. GasBuddy prices are averages of local regular unleaded gasoline prices that about 700,000 volunteer gas prices spotters have posted online. Individual drivers may see lower fuel prices in different areas of each state.


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