Where do gas prices go next?

A few critical factors will govern how far gas prices fall from last week's record levels.

By , Staff writer of The Christian Science Monitor

Gasoline prices have begun to ease, but even when all Gulf Coast refineries are running again later this year, consumers may not see a full retreat to pre-Katrina levels.

That conclusion, analysts say, stems from a simple equation involving the cost of a barrel of crude, markups by middlemen, and little margin for error in the nation's energy infrastructure. Across the country, gasoline prices soared into uncharted territory - above $3 per gallon last weekend - stunning motorists and prompting many to shorten or skip Labor Day trips.

Concerns about price gouging by gas stations are being investigated in state capitals and the halls of Congress. Prices have already begun to pull back, as some refineries and long-distance pipelines affected by hurricane Katrina return to full strength.

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How far and how quickly prices fall now depend on a few critical factors: when four damaged refineries come back on line, how quickly emergency shipments of gasoline from foreign refineries arrive, and most important, where oil prices go from here.

"As long as crude is high, the gasoline price will be high, although it doesn't have to be where it was the past few days," says Ron Gold, an energy analyst at the Petroleum Industry Research Foundation.

Oil prices fell Thursday to around $64 a barrel in midday trading after Energy Department figures showed higher than expected post-Katrina inventories.

The department's Energy Information Administration said this week it expects gasoline to reach $2.60 a gallon by year end and to average $2.40 a gallon in 2006. Despite the predicted drop, that would still be above July levels, which the EIA pegged at nearly $2.32 per gallon.

Of course, as with all forecasts, actual prices - like gas mileage - may vary. But prices in the mid-to-high $2 range represent a significant shift in what is, for many Americans, the most visible gauge of energy costs.

The question for the economy is how much gas prices will affect overall consumer spending, which drives two-thirds of US growth. So far, recession is not in most forecasts, but high energy costs have been a key predictor of economic slowdowns in the past.

And gas prices are just part of the picture. Although gasoline accounts for about half of America's oil use, surging energy prices in recent months may show up most sharply in heating costs this winter. Natural gas, home heating oil, and electricity costs are all rising.

The thought may be enough to prompt a rush for cardigan sweaters. But the price of those may edge up, too, as oil prices ripple through trucking and shipping costs.

Several factors, thankfully, could soften the shock at the gas pump and beyond.

For one thing, everything from automobiles to refrigerators to factories are more energy efficient now than they were in the 1970s. This shelters the economy somewhat from price swings.

Emergency responses to hurricane Katrina are helping as well: The Bush administration has eased regional gas-blend rules, so supplies can move freely to wherever they're needed. Strategic petroleum reserves are being tapped. Foreign supplies of gasoline are on the way. And on the Gulf Coast, which contains almost half of America's refining capacity, oil companies are racing to bring refineries and platforms back on line.

"The panic component of the gasoline prices should drop back down to something more in line with oil prices," says John Tobin of the Energy Literacy Project in Colorado.

Any price gouging that occurred in the wake of Katrina may be squelched soon, as federal and state watchdogs track down consumer allegations.

Indeed, as Katrina pushed up wholesale prices for gas by 50 cents or more overnight, America's streetscape grew surreal. In one stretch of road near Boston, retail prices for regular unleaded ranged from $3.04 to $3.69 per gallon last Friday.

"To some extent [price gouging] has happened," says Mark Routt, an analyst at Energy Security Analysis Inc. in Wakefield, Mass. "But my understanding is that it's been relatively rare and isolated."

In general, gas prices are driven by predictable economics: The price for crude oil, costs of refining and transporting, operating costs for 167,000 gas stations, and profit margins for all parties.

Prices typically drop heading into winter as driving season winds down. The gas tab also varies by state depending on tax levels and environmental regulation.

As for crude oil, it is measured in barrels that equate to 42 gallons each. "At $65 a barrel, that translates into $1.55 plus per gallon," before refining, distributing, or taxing, says Mr. Gold of the Petroleum Industry Research Foundation.

Economic forecasts vary on where that base-level price heads to next.

"World oil markets are fundamentally tight," says A.F. Alhajji, an oil economist at Ohio Northern University in Ada, Ohio. He wouldn't be surprised by oil at $75 oil a barrel in coming months.

But others say the current high price could give producers an incentive to reopen wells that weren't profitable at $35 a barrel. And it gives consumers an incentive to conserve. "Demand responds to the price signal," says Gus Foucher of Economy.com in West Chester, Pa., who predicts oil will cost $50 by the end of 2006. "Once we get through the hurricane season I think things will calm down a bit."

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