Drivers in US Should Enjoy Cheaper Gas
For months motorists have watched as their local service stations ratcheted prices up. Now, gasoline prices - and almost all oil prices - could be headed south.
The final shove may have come on May 20 when the United Nations agreed to allow Iraq to start to export up to 700,000 barrels of oil per day. Although it will take about six weeks until the Iraqi oil is loaded on tankers, prices could start down even sooner.
If prices do fall, it will be good news for everyone from consumers to Federal Reserve officials. Over the past several months, steadily increasing oil prices have rippled through the economy. Last month, for example, higher energy and food prices added 0.4 percent to the cost of living. Moderating or declining oil prices could help to cool the inflation rate and take some pressure off the nation's inflation cop, the Fed, to raise interest rates.
The Fed Open Market Committee met May 21 and most economists expected it would not make any new interest rate moves.
The increased supply comes at a time of high-octane antics in Washington. The Republicans are still trying to lower the federal gas tax. At the same time the Department of Energy is preparing a report to President Clinton to explain why prices went up so sharply. And the Department of Justice is trying to determine if the oil companies had any culpability for the price spike.
Prices shot up after the long harsh winter depleted oil inventories to a historically low level. With official Washington, during an election year, focusing on the oil giants, "it puts pressure on the companies to bring about lower prices," says Ed Rothschild, energy policy director at the the Washington-based consumer group Citizen Action.
While Washington fumes, energy analysts expect prices at the pump to drop between 6 and 8 cents a gallon by the end of the year. This would bring the national average price of self-served unleaded fuel to about $1.23 cents per gallon. So most energy analysts expect to see plenty of gasoline at reasonable prices during most of the summer travel season.
The Iraqi crude is not expected to reach tankers until early July. This could start to drag down the price of oil and gasoline during the summer months when demand is traditionally lower.
"I suspect it will take $2 to $3 off the price of oil by the end of the year," says Joyce Yanchar of DRI/McGraw-Hill, an economic consulting firm in Lexington, Mass.
This should mean that prices will start to fall this summer, if not by Memorial Day.
"When people go to fill up, they should see lower prices than the week before and the week before that," says Bill Veno, associate director of refined products at Cambridge Energy Research Associates in Cambridge, Mass.
Mr. Veno is optimistic gasoline prices will decline because crude oil prices have been declining for the past month, ever since Mr. Clinton announced he would sell 12 million barrels of oil out of the Strategic Petroleum Reserve over the next 30 days. This comes to about 400,000 barrels of oil per day.
"It caused the players to pull back and rethink their game plan," says Alvin Silber, an oil analyst at Herzog Heine Geduld, a Wall Street brokerage house.
The additional oil supply is important because demand has remained strong this summer. Mr. Silber estimates demand is up about 2 to 2.5 percent, reflecting the general pickup in the nation's economy and the increased use of fuel guzzlers.
Consumer demand is expected to remain strong. Mike Morrissey of the American Automobile Association in Heathrow, Fla., expects a 2 percent increase in people traveling this summer.
"It's not a blockbuster year - the fact we don't have a 10 to 15 percent increase means gas prices should stay fairly moderate," he says.
Energy analysts will be watching the meeting of the Organization of Petroleum Exporting Countries next month.
Silber expects the oil producers to announce a temporary reduction in quotas to make room for the Iraqi production.
"No one will believe that. It's questionable what if anything they will do," he says.
Saudi Arabia has already indicated it wants to increase its petroleum production, not lower it.