Experts predict gas prices will continue decline

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October 27, 2008

Anonymous The Joplin Globe Mon Oct 27, 2008, 11:29 PM CDT

By Wally Kennedy

wkennedy@joplinglobe.com

Myra Ayotte, of Joplin, drives a fuel-efficient vehicle to save money.

But as the cost of fuel plummets, she’s still being careful about the money she spends.

“I drive an economy car so I get excellent gas mileage, but gas prices still affect me,” she said. “Even though gas prices are lower, the price of everything else has gone up.

“I had planned on going out of town last week, and even with gas prices going down, we were not able to make the trip because of the prices of everything else.”

That reluctance to travel because of uncertainty over the economy is one reason why prices for fuel have fallen and could continue to fall in the months ahead.

As the cost of a gallon of regular gasoline fell to $1.97 at some local convenience stores on Monday, the question was: How much lower could it go? The answer: Nobody knows how low it will go, but it will go lower, analysts say.

John Buchanan, an analyst with the Missouri Energy Center, said, “I’m not bit a surprised by the decline in prices, but how much further it will go is really hard to predict. The answer to that is there is no bottom in sight.”

For the past couple of years, the price of gasoline and diesel have been in lockstep with the commodities market for oil. When a barrel of oil traded at $147 in July, the cost of a gallon of regular gasoline peaked at $4 nationwide.

On Monday, crude oil was selling for $61 a barrel, a 17-month low. To prop up the price, the Organization of Petroleum Exporting Countries (OPEC), which produces more than 40 percent of the world’s oil, decided last week to cut production by 1.5 million barrels.

But despite that, energy analysts, including African oil producers Nigeria and Libya, are among those projecting a drop in price to $50 per barrel by the end of the year and a price of $45 per barrel in 2009. The last time oil traded in the $45 range was in February 2005.

Buchanan said investors no longer see the commodities market as a safe harbor. That’s one reason why the cost of a barrel of oil has fallen so dramatically.

“What’s happening is a response to the severity of the perception that we are in a full-blown recession, as opposed to just entering one,” said Buchanan. “The economy is having a huge impact on the cost of oil. It was a safe harbor for investment, but there has been a wholesale bailout of the commodities.”

Buchanan said another factor in the decline is the global demand for petroleum, which peaked in July. Since then, that demand has fallen off dramatically.

“Investors were looking for continued growth in emerging markets, that has dropped off significantly,” Buchanan said. “Countries, including China, that had been importing oil are reducing their imports down to nothing.”

Despite the fact that gasoline prices are half of what they were during the summer driving season, demand is still down in the United States. The U.S. Energy Department reported Thursday that U.S. oil and gasoline stockpiles were sharply higher than expected and that gasoline demand was down 5.2 percent in September. The decline in August was 5.6 percent.

“Demand is measured in vehicle miles traveled, the VMT. Even though prices for fuel have come down, there is no increased demand for fuel,” Buchanan said. “What this tells me is that people have no confidence in the economy and that they are keeping their money close to their vest. People are hanging onto their money and not taking on any additional debt.”

The reduction in the cost of fuel should act like an economic stimulus package, but it’s not, said Mike Right, with AAA of Missouri.

“The decline in demand in the United States is now in its 10th consecutive month. This started back in 2007,” he said. “Before, it would go down for a month and then come back. We expect this decline in demand to continue for the rest of this year.

“You would think that a lower price for gasoline would stimulate more driving. But nobody’s going out joyriding,” he said. “Instead, people are holding back. They’re are dealing with rising food costs, and anxiety over the stock market, unemployment and credit. There’s an awful lot of anxiety out there, and people are reducing expenses whenever and wherever possible.”

Globe staff writer Dustin Shipman contributed to this report.

Look back

The last time gasoline prices were this low was during a brief period in February of 2007. The last time prices for regular gasoline were consistently below $2 a gallon was in the summer of 2005, according to the Missouri Energy Center.