Gas Prices Spiral Down to Near $2
Soft Economy Saps Driving Demand, Upends Debate Over Alternate-Energy Policy
By ANA CAMPOY
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Crude-oil prices sank below $50 a barrel, and the average cost of a gallon of gasoline at the pump hovered just above $2, a free fall in prices that is reverberating through the economy.
The sudden reversal -- the fastest and sharpest since 1980, when the government began tracking monthly gasoline prices -- is bringing relief to some and complicating business for others. Tumbling energy prices led October's 1% decline in consumer prices, deepening concerns about a long recession.
[Gas Prices Spiral Down to Near $2] Associated Press
A customer pumps gas at the Speedway convenience store on State Route 4 in Monroe, Ohio.
Earlier this year, skyrocketing oil prices pulled gasoline to its highest inflation-adjusted level ever, surpassing prices reached during the oil crisis in the early 1980s. The jump, arriving in tandem with soaring food prices, hit consumers hard and stoked fears of inflation.
The price shock began to change Americans' behavior. Cost-conscious drivers gave up solo commutes to ride buses and trains, made fewer trips to stores and restaurants, and started buying smaller cars.
But the global economy, roiled by a spreading credit crisis and falling demand for goods and services, has worked to deflate energy prices even faster than they rocketed upward early this year. In July, crude oil settled, at a peak of $145.29 a barrel and retail gasoline peaked at an average of $4.114 a regular gallon. Now, prices are less than half those levels.
The price for crude-oil futures dropped $4, or 7.5%, to $49.62 a barrel Thursday on the New York Mercantile Exchange, the lowest settlement level since May 23, 2005. Gasoline-futures prices fell to their lowest level in their traded history, shedding 10 cents a gallon to $1.007. And at the pump, the average national gasoline price dropped to $2.02 a regular gallon, according to auto club AAA. In 23 states, gasoline already is selling for less than $2 a gallon, and is down to $1.72 a gallon in Missouri.
The last time consumers paid less than $2 at the pump was March 2005, when a regular gallon cost an average $1.99, based on AAA data.
Some government officials and environmentalists are worried the plummeting prices are reversing any energy-conservation gains realized in the past year, when high prices forced Americans to cut back. The economic case for investing in renewable energy, which was looking cheaper, compared with soaring fossil-fuel costs, now is less compelling.
[Gasoline] Associated Press
Suddenly, public debate has shifted from trying to find ways to lower prices and give consumers a break to wondering whether federal gasoline taxes should be raised to support higher prices.
President-elect Barack Obama said this week it is even more important to curb Americans' appetite for oil now that prices are cheaper. "Oil prices go up, gas prices at the pump go up, everybody goes into a flurry of activity. And then the prices go back down and suddenly we act like it's not important," he said during a television interview. "As a consequence, we never make any progress."
So far, though, the worsening economy appears to be an even stronger curb on driving as consumers hunker down and businesses contract. The U.S. Energy Information Administration expects full-year gasoline demand to fall 3% this year, which would mark the sharpest annual decline since 1980. And though gasoline prices continue to sink, forecasters expect demand to fall again next year.
Even those who can afford to drive more are holding back over fears of a prolonged recession, or the possibility that prices will ricochet upward again.
"It seems like [prices] dropped like a rock overnight," said Kristin Cartwright, as she filled up her Ford Expedition in Dallas Thursday. The 42-year-old stay-at-home mom said it worried her that she can't figure out what is causing the wild price swings. So she is keeping her driving to a minimum.
Unquestionably, the lower gasoline prices are a relief amid an otherwise grim outlook for households and businesses that consume fuel, as well as the retailers that rely on consumer spending. The drumbeat of dire economic news has sharply curtailed consumer spending as people worry about their jobs and conserve their money.
Javier Amador, a 36-year-old carpenter in Dallas, where regular gasoline is selling for about $1.85 a gallon, said spending less on gasoline will help him afford a nicer Christmas for his family. But after the holidays, one of Mr. Amador's New Year's resolutions is to save money. Although he has a steady job, talk of layoffs among other construction workers is making him nervous.
"It's like a chain: If one company doesn't have work, then there's less work for others, and it could trickle down to my company," he said.
Mark Perry, a professor of economics at the University of Michigan in Flint, sees lower energy prices as a continuing stimulus for the economy. Adjusting for inflation, consumers are paying less for gasoline now than they have paid throughout much of the past century.
He estimated that at current consumption rates, Americans save $1.38 billion a year for every penny gasoline prices drop. That is about $290 billion since gasoline prices peaked in mid-July, and more than the tax rebates Americans received in the mail earlier this year.
"Everybody is saving whenever they fill up, and this will free up additional funds and resources they can use instead of just putting gas in their car," Mr. Perry said.
Discount retailers, which have many low-income customers who cut back on purchases as gasoline prices rose, are now seeing a rebound effect. Though overall retail sales fell 2.8% in October, cheaper gasoline helped Wal-Mart Stores Inc. post a 9.8% jump in profit for the third quarter ended Oct. 31, sharply outpacing its peers.
But cheaper energy is hurting others. Refiners are getting squeezed, because gasoline prices fell faster than prices for the crude oil they use to make the fuel. In an effort to pare losses, many refiners have cut back gasoline production and are delaying expansion projects.
Ethanol producers also are suffering. Like refiners of oil-based gasoline, they face weaker demand for their products as drivers pinch on fuels.
Analysts have been slashing 2009 profit forecasts for global oil companies, as falling energy prices quickly deflate recent record-setting revenue. Oil companies will be rethinking certain high-cost development projects to see whether they still make sense at $50-a-barrel oil.
Most immediately, companies will likely cut back spending on hefty share-buyback programs. Exxon Mobil Corp., for one, has been spending about $8 billion a quarter buying up its own shares.
The companies also are expected to delay signing contracts for steel, engineering and oil-field equipment in order to push down prices that were inflated along with crude oil in the past couple of years. "The more they defer projects, the quicker they deflate these costs," says Fadel Gheit, an oil analyst at Oppenheimer & Co.
Eroding demand for fuel contributed to crude oil's fall below $50 a barrel Thursday, as U.S. crude inventories rose more than expected this week, requiring oil companies to leave millions of barrels of oil in storage.
Economists have found that, in the short run, a 10% reduction in gasoline prices boosts consumption by a slender 0.2% to 0.5%, says John Cook, director of the petroleum division at the EIA. But when hit with a 10% decline in gross domestic product -- a measure of a nation's economic health -- consumption falls a much steeper 4% to 6%.
As consumers spend less, companies see their business shrink, which also lessens demand for fuel. Lower sales mean fewer trucks are needed to transport goods across the nation.
[Gasoline]
Write to Ana Campoy at ana.campoy@dowjones.com:
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