There’s one bit of good economic news for drivers this summer: Gas prices are expected to be more than a dollar per gallon lower than they were last year.
Entering the peak of the driving season last year, the national average price for a gallon of gas was $3.40, and most energy analysts at the time predicted prices would rise throughout the summer. Oil had reached $120 a barrel April 28, 2008, eventually climbing to a record high of almost $147 per barrel in July 2008, and even the president of the Organization of Petroleum Exporting Countries would not rule out the possibility of oil topping $200 a barrel.
Then the global recession arrived.
Today, according to the AAA Fuel Gauge Report, U.S. gasoline prices are now hovering just above $2.25 a gallon, and the Energy Information Administration, or EIA, projects that the nationwide price of gasoline will average a $2.23 a gallon through the end of September.
“Prices are expected to remain low during the summer driving season because of the global economic slump, which has reduced demand and increased domestic gasoline inventories,” says Laurie Falter, an EIA analyst. On a month-to-month comparison, she says, U.S. gas consumption has remained almost 2 percent lower this year than last. Furthermore, some energy analysts are predicting energy prices may remain low for years to come.
So, what does all this mean to you? Is this time of affordable gas the right moment to go out and buy that modern-day muscle car or sport utility vehicle you’ve always dreamed of? Is this the year to take the family on that road trip across the country? Or is this the perfect time to buy one of the latest-generation, fuel-efficient, “strong” hybrids that American and Japanese car makers are bringing to the automotive market?
Blame the economy
“We don’t think that the nationwide average price of self-serve regular is going to exceed $2.50 this summer,” says Geoff Sundstrom, resident fuel-price analyst and director for public affairs at the AAA. “We are noting with interest the recent run-up in the price of oil and, to a certain extent, the rising price of reformulated gasoline experienced and some areas. However, right now, we’re not convinced that current demand can necessarily sustain a $60-per-barrel oil price. In fact, what we’re seeing in terms of discretionary driving related to travel is a relatively flat demand situation for gasoline this summer.”
One of the untold stories with respect to U.S. gasoline prices, says Sundstrom, is not so much the fact that Americans are not traveling by car the way they used to, but rather that our current gas prices are a reflection of the marked decrease in gasoline demand from commerce.
“People are just not driving out to make sales calls like they used to, they aren’t driving a rental car when they are doing business in another city and they aren’t taking the big F-150 pickup to a construction job site. A great deal of the gasoline that is burned in the course of the day is used by business, and that’s what we’re missing right now,” Sundstrom says.
One of the most important factors impacting gas and oil prices is the connection between energy demand and overall economic activity, says Sara Banaszak, senior economist at the American Petroleum Institute, or API. “When an economy is growing, it is using and consuming more and more energy and it is creating an increased demand for energy resources. Similarly, when an economy experiences an economic decline, such as the one we are experiencing right now, you see energy consumption fall. This current, global economic downturn is the biggest, albeit temporary, factor why we’ve seen this tremendous drop in terms of energy prices.”
Regional price differentials
Although there are parts of the country where gasoline prices seem to have spiked noticeably in recent days, Sundstrom sees this as part of the normal pattern associated with the start of the summer driving season. Most of the price increases are due to the introduction of summer blends of gasoline, many of which have to be reformulated for particular metropolitan areas to meet certain specific clean-air standards, he says. “This is not exactly something new, it is part of the traditional, seasonal pattern that we’ve all come to know and have experienced.”
The Memorial Day holiday weekend generally is considered the unofficial start of the summer driving season, and gasoline prices traditionally rise in anticipation of increased demand. This summer, in addition, the AAA foresees about a 1.5 percent increase in the number of Americans traveling by car.
“I don’t think we’ll be in a situation this year in which we’ll see gasoline prices exploding like they did last summer,” says Phil Flynn, an energy analyst for Chicago-based Alaron Trading Corporation. “But I do think that we’re going to see gasoline prices rise a bit more than the EIA has perhaps envisioned — not too much more, but definitely a bit higher — because I believe … oil prices might reach $70 a barrel. Prices should peak sometime around the Fourth of July before, ultimately, pulling back later in the summer.”
Flynn also has concerns that the various grades of so-called “boutique blends” have the potential to create situations of short-term gas price spikes in parts of the country where such specific reformulated gasoline must be sold because of existing Environmental Protection Agency mandates.
“These various blends of gasoline, which must be used and which can vary greatly from one metropolitan area to another, really impact upon the fungibility of our nation’s gasoline supply. That means, for example, if we happen to lose a refiner this summer who makes the specific blend of gasoline for the city of Milwaukee, it’s not like anyone will be able to step up and just ship in the gasoline that is made for Chicago or for Detroit. Consumers in Milwaukee will then be stuck because no other refinery can just step in and pick up the slack. Consequently, prices in Milwaukee will go up and remain high until the original bottleneck is somehow addressed or remedied,” he says.
So far so good
Current inventories for oil and gasoline are at good, healthy levels, says Sundstrom, who adds that about the only things that we really need to be concerned about is the weather — like another major hurricane in the Gulf of Mexico — and what might possibly happen in the turbulent Middle East. “Those are the potential things that could be sitting out there that can possibly complicate the universe and what will happen with the price of oil very quickly.”
Another big question, too, is the potential impact on U.S. energy prices that any cap-and-trade legislation might have if it is passed by Congress in the near future, says Banaszak. “No one right now can really say how or how much such a carbon tax will impact upon the cost of a gallon of gas.” Adopting such a far-reaching policy could, separate from market forces, change the price structure for a lot of things in our economy and impact America’s economic vitality.
“And everything, ultimately, is going to depend on how quickly the economy recovers and how people will respond to energy prices,” says Flynn. “Ultimately, we should be happy if we start consuming more oil regardless of price because that might be a sign the economy has recovered and we’re getting back to normal.”
So enjoy the comparatively low gasoline prices while they last and don’t be afraid to hit the road with your family this summer.
However, don’t consider these comparatively low gasoline prices an excuse not to purchase that fuel-inefficient vehicle you’ve had your eye on. Odds are you will come to regret that decision when economic growth and energy prices come back into balance.