On high gas prices, signs of relief

Wholesale gasoline prices have dropped 24 cents in the past week.

You might get an unexpected surprise at the gas pump over the next few weeks: lower prices.

Over the past seven days, the wholesale price of gasoline has plummeted 24 percent as the nation's refineries have kicked up production and foreign imports have flooded the country. This steep drop in prices has yet to show up at the pump, but most energy analysts expect it will. In fact, by July 4, Americans may be able to drive to fireworks displays without needing to take out a bank loan to pay for their fuel.

"As long as nothing else major happens, like a major refinery fire, we are starting to see the beginning of the downturn," says Doug MacIntyre, an oil market analyst at the Energy Information Agency in Washington.

Prices are falling despite roiled international oil markets. This week, Iraq, apparently unhappy over the prospect of a stricter sanctions regime at the United Nations, decided to close the spigot on 2 million barrels of oil per day - an amount that is hard to replace immediately. Then, on Tuesday, at a meeting in Vienna, the oil-producing cartel OPEC said it would postpone a decision on how to react to Iraq. It left its oil production unchanged. However, the oil markets shrugged off the news, and the price of oil and gasoline fell again on Tuesday.

"Let's just say that Iraq stops filling up its last couple of tankers in the next day or two. So there won't be an impact on the gasoline markets until mid-July, and right now the [futures] market is saying this is not a huge issue," says Adam Sieminski, an energy analyst at Deutsche Banc Alex. Brown Inc., a brokerage house.

One of the reasons the market may be less concerned is that Iraq has either shut down or slowed its exports before - usually just prior to the UN considering another six months of sanctions in its oil-for-food program.

Last December, Iraq also restricted its exports when it wanted to be paid in euros instead of dollars. The earlier shut-downs lasted no more than a month. "We do not know what Iraq's game plan is," said Saudi Oil Minister Ali al-Naimi in a Reuters news story. "Will this last a day, a week, a month?"

If Iraq remains shut down for a month, energy analysts are convinced Saudi Arabia, Kuwait, or Venezuela - all with spare capacity - will ratchet up their exports. OPEC has scheduled a meeting for July 3. "They could readily make up the loss," says John Lichtblau of the Petroleum Industry Research Foundation in New York.

The Iraqi action comes at a time when gasoline inventories are rebuilding.

Over the past several weeks, refineries have been operating at 95 percent of capacity to get ready for the summer driving season. Now, according to the American Petroleum Institute, gasoline inventories as of June 1 are higher than they were last year at this time. "That has to be good news," says Bill Hickman, a spokesman for API, which released inventory numbers yesterday.

As the inventories have increased, the wholesale price has dropped from a peak of $1.16 a gallon on May 23 to 88 cents a gallon. However, this has not really shown up in the retail prices, which have dropped only a few pennies a gallon.

According to the latest government survey, the average retail price for regular gasoline is $1.679, down from $1.713 on May 14.

"I am presuming retail prices are going to come down to reflect how strongly inventories have built - this is an extremely competitive business in terms of marketing," says Mr. Sieminski.

But energy analysts doubt the retail price will fall as much as the wholesale price. "I imagine the oil companies will be a lot slower to lower prices as their costs come down than they were to raise them on the way up," says Mike Fitzpatrick, an energy analyst at Fimat Energy Futures in New York. For example, refineries in California are warning that they may cut production if they are not exempted from the rolling blackouts.

Putting the RVs in park

Some folks seem resigned to higher prices. "Like it or not, we've got to ride this thing out, because let's face it, it's the only thing we can do. The big conglomerates like OPEC don't care what we have to say," says Doug McCollum, manager of Rocky Mountain RV, a Butte, Mont., dealer of recreational vehicles.

Higher prices have cut into promotions during what is the area's busiest season. Normally, the company sends dozens of recreational vehicles to shows throughout the state, but this year gas prices have forced them to be frugal.

"We don't move units to other towns unless we have to," Mr. McCollum says.

The hardest-hit of his customers are the weekend road warriors, who are less inclined to pack the family in the Winnebago and head for Glacier National Park.

"High fuel costs have dampened sales, no doubt about that," he says. "A lot of people who like to get out every weekend with their RVs just aren't going as much."

$250 to fill-'er-up

While consumers just have to grin and bear the higher prices, some truckers have started to pass on their higher diesel costs. That's the case with Charlie Hoekema, a long-haul trucker. "If you're going to be here next year, you've got to pass on your costs," he says from his office in Amsterdam, Mont., near busy Interstate 90.

Mr. Hoekema says that when gas went over $1.50 a gallon, he told his customers he was assessing a surcharge. "You don't realize just how much more expensive it is until you pull up to the pump," he notes, pointing out that a fill-up that used to cost $125 is now $250.

With the price of diesel falling at the same rate as gasoline, that fuel bill is likely to come down soon as well.

Todd Wilkinson in Montana contributed to this report.

(c) Copyright 2001. The Christian Science Monitor

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