Industry experts see substantial drop in gasoline prices down road

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September 16, 2008

Anonymous The Joplin Globe Tue Sep 16, 2008, 09:50 PM CDT

By Wally Kennedy

wkennedy@joplinglobe.com

The cost of regular gasoline in Joplin fell about 3 cents on Tuesday from $3.59 to $3.56 a gallon. That decrease, though small, could signal the beginning of a much larger decline in coming days and weeks.

The decline is being fueled by several market forces. The demand for fuel is down because of its high price and because of the global economic slowdown. The summer driving season is over. The cost of a barrel of oil has dropped from its peak of $147.27 on July 11 to approximately $92 a barrel on Tuesday.

At this stage, market watchers are not willing to go out on a limb and say how far the price of gasoline could drop. The words they most frequently use to describe what will happen is “a substantial decline.’’ Could it drop more than 60 cents to below $3 a gallon?

“There is that potential, but things are too uncertain for anyone to say how far prices will fall,’’ said Rob Leone, with the Missouri Petroleum Marketers and Convenience Store Association.

“I would say nobody really knows for certain the extent of damage from Ike, but if they get everything up and running within a week to 10 days, and assuming no other natural disasters, the price should decrease substantially,’’ he said.

Mike Right, with AAA of St. Louis, said, “It could be days as opposed to weeks before we see a substantial decline, if reports are true of only minor damage to refineries and pipelines along the Gulf.

“There has been a precipitous decrease over the last few weeks in the cost of crude oil,” Right said. “Gasoline prices track crude prices. Right now, the Missouri average for a gallon of regular gas is $3.67. That’s up about 15 cents on average today versus a month ago.

“But, we are paying a premium of 40 to 60 cents a gallons for both Gustav and Ike,’’ Right said. “Though something else could happen, such as political unrest, I think the price of gas could fall significantly from where they are today.’’

The national average for a gallon of regular gasoline was $3.84 on Monday, according to AAA, the Oil Price Information Service and Wright Express.

A chief oil analyst with the Oil Price Information Service on Tuesday said it could be at least another two weeks before the supply shortages caused by Gustav and Ike ease.

John Buchanan, with the Missouri Energy Center, a division of the Missouri Department of Natural Resources, on Tuesday said a decline in the price of gasoline is coming, but before that can happen, 14 major refineries and three pipeline distribution networks along the Texas Gulf Coast must get back into operation.

The pipelines, he said, serve Missouri and seven other states in the Midwest.

In addition, those refineries are switching from the summer specifications for fuel to the winter specifications. That change in fuels was to begin today. When the hurricanes hit, distributors were reducing inventories to make room for the new winter gasoline.

“Hurricane Ike hit at a challenging point in time,” Buchanan said. “The distributors had smaller margins of motor gas in the transition from the summer season to the winter season. It was the perfect storm.’’

When the cost of crude oil peaked in July, gasoline prices surged to a record $3.89 a gallon on average in Missouri. The price of gasoline can shoot up immediately, but the declines come more slowly in incremental steps.

“The actual increase from Hurricane Ike was up roughly 80 cents in the last week,” Buchanan said. “The full increase was not passed on into the market, only a portion was passed on.”

“As supplies are restored, the distributors will recoup what they lost. The decline in prices will be gradual and carry forward for a number of days until they collect what was lost.’’

Buchanan said the approach is to knock the top off the spike and raise the bottom of the trough that follows so that a sense of market stability is maintained.

“Price declines will run parallel with the restoration after Ike,” he said. “Once the industry gets legs under itself, the decline will be in pennies and then more. We are stressing to people that they maintain a sense of calm and don’t be reactionary. We have adequate supplies in the system.’’

In light of the turmoil in financial markets worldwide, Buchanan noted that a decline in gasoline price does not necessarily mean “that people will spend money on gasoline after it comes down. I think they will be holding onto their dollars for the next several months because they are concerned about everyday expense. That could further reduce demand and lower prices.’’

Demand dip

The high cost of gasoline reduced demand for gasoline by about 4 percent nationwide when compared with demand a year ago, according to analysts. The decrease in Missouri was about 2 to 3 percent.