Gasoline Prices Drop 22% and May Fall Further

Posted on October 15, 2008 by LCT Staff - Also by this author - About the author

HOUSTON – U.S. gasoline prices have skidded 22% from their highs and may fall further as the economy slows and as refinery operations disrupted by hurricanes return to normal.

A gallon of regular gasoline cost on average $3.206 a gallon on Monday, according to AAA's Fuel Gauge Report. Since hitting a peak of $4.114 on July 17, prices in many places have slid below $3 a gallon. Just a few months ago, before the credit crisis reached fever pitch, talk of $5 - or even $6 gasoline - was bandied about, underscoring how quickly the outlook for fuel prices has changed.

U.S. drivers complained as prices made their way up, as spending on fuel crimped disposable income, but it is unlikely that they will be celebrating with prices on the way down. The global financial crisis and stock-market rout have overtaken pump prices as matters of concern, although the stock market did rebound Monday.

Americans drove 53.2 billion fewer miles from November 2007 to June 2008 - a 4.7% decrease - compared with the same period a year earlier, according to the Federal Highway Administration. Typically, driving increases from year to year. However, a decrease was seen during the energy crisis of the 1970s, though the current decline is much more steep.

Mr. Halloran predicts that prices could go even lower, in part because refineries are still working out the kinks in distribution caused by hurricanes Gustav and Ike. Ike shut down 14 Gulf Coast refineries and Exxon Mobil Corp.'s Beaumont refinery still hasn't restarted.

The September storms disrupted refinery operations and pipeline shipments across the eastern half of the country, causing shortages in the Atlanta and Charlotte areas. Prices were higher than the national average in those areas but the real worry, the regional AAA said, was the lack of gasoline.

As the economic picture has turned worse, so has oil refiners' situation. The gasoline crack spread, or difference between gasoline-futures and crude-futures prices, has been negative, a rarity. With a negative crack spread, refineries are likely to cut rates or be slow to resume after Ike.

However, hurricane-impacted refiners still have to build stocks depleted by the storm, Mr. Halloran said. They need to maintain a minimum level in order to serve costumers and right now they are below that base, he said.

This increase in inventory may lead to cheaper gasoline later this year, Mr. Halloran said.

The federal Energy Information Agency usually reports average retail fuel prices on Mondays, but these data have been delayed due to the Columbus Day holiday.

Source: Wall Street Journal

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