Kevin G. Hall - McClatchy Newspapers

Edition Date: 10/03/08

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WASHINGTON — Oil prices have fallen more than 26 percent from their July 11 record high of $147.27 per barrel, and all evidence points to further declines. The price Americans pay at the gas pump has fallen by a more modest 12 percent at Thursday's national average of $3.67 a gallon.

That's led some consumers to wonder if they're being gouged. Here are some explanations for why the price of gasoline, while falling, isn't moving in lockstep with falling oil prices.

Q. Why aren't gasoline prices mirroring oil's slide?

A. "Because they didn't go up high enough in the first place," explains Phil Flynn, an expert in oil contracts for Alaron Trading in Chicago. "The truth of the matter is when crude oil went up to $147 a barrel, the refiners weren't able to pass on the entire cost of crude at the pump."

In mid-March, oil prices were just under $100 a barrel and gasoline stood at an average of $3.27 a gallon. When oil hit $147, it was a 47 percent jump. Gasoline prices peaked 84 cents higher, a rise of about 25 percent.

Q. In other words, oil refiners weren't able to pass along all their rising oil costs to consumers and now they're trying to take profits on the downside?

A. That seems to be the case. The soaring oil prices clearly were not responding to simple supply and demand. Prices shot up earlier this year in part because of factors like a weakening dollar, inflation and fears of a U.S. financial meltdown. Investing in oil contracts became a safety hedge, kind of like investing in gold on fears the dollar would weaken further. (Gold prices, too, have since fallen dramatically.)

Even as evidence mounted that demand for oil and gasoline was falling, especially in the United States, oil prices moved up despite the contrary demand signals.

Q. So gasoline prices should have been higher than the record $4.11 a gallon nationwide average on July 17?

"Had the cost of gasoline kept up with the cost of crude ... gasoline prices at the peak should have been 20 percent to 25 percent higher," said Flynn, adding that refiners had to eat a lot of the rising costs and now "are trying to make back some of the money as prices go back down."

Q. Well that's the view of an oil trader. Who else shares that view?

A. The AAA Motor Club believes that gasoline prices did not match the run-up price and thus won't likely parallel the drop in oil prices.

"We're in general agreement. Definitely when oil got to $147 a barrel back in July, that cost was not fully passed along to the consumer because, as many Americans know, we were making fewer visits to the gasoline station for most of this spring and summer," said Geoff Sundstrom, a national spokesman for AAA. "And so to a certain degree the profit margins at your local gasoline station were slim to none. ... I don't think it has anything to do with manipulation."

Q. What's going to happen to gasoline prices going forward?

A. On just supply-demand variables, everything points to further drops in oil and thus gasoline. Thursday's gasoline inventory report from the Energy Information Administration showed that last week's gasoline supply fell by 1 million barrels, not the 1.8 million expected in most forecasts. That pushed prices for next-month oil delivery down to $107.92 Thursday on the New York Mercantile Exchange.

Americans are simply driving less and switching to more fuel-efficient vehicles. Gasoline consumption fell by 1.6 percent over the peak summer season in July and August, the EIA said, and that's the first time that's happened in 16 years. And a weakening global economy means even less demand for oil and gasoline.

"We believe that as long as the oil price stays near current levels ... the nationwide average price would hit $3.50 a gallon some time this month," said Sundstrom. "We're talking about an additional decline of 15 cents to 17 cents per gallon."

If oil prices fall below $100 a barrel after the hurricane season — predicted by some analysts — Americans could be looking at $3 a gallon gasoline later this year.

A lot of factors would have to come together for that to happen, however. And the oil export cartel OPEC meets Wednesday, with some members like Iran vowing to slash production to prevent prices from falling under $100 a barrel. Stay tuned.

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