Some signs of relief on gasoline prices

Over the short run, the energy markets are also watching for updated corn crop estimates given the flooding in the Farm Belt. On the futures market, the new crop corn is up about 25 percent in the first half of June. "One of the uncertainties is the ethanol situation in the Midwest," says Tancred Lidderdale, an energy analyst at the Energy Information Administration in Washington.

"A number of plants are shut down, there has been a disruption of the distribution process, and the railroads are flooded," he says. "We typically have gotten imports from Brazil, and they can increase their exports but I'm not sure they will."

With gasoline prices on the rise for months, consumers are now starting to cut back. According to the EIA, in the first quarter of the year, demand for gasoline fell about 100,000 barrels per day, or about 1.3 percent of daily consumption. For the year, EIA expects consumption to drop 0.7 percent over 2007. "This would be the first year over year decline in consumption since 1991," says Mr. Lidderdale.

The lower gasoline consumption is probably due largely to less driving. According to Department of Transportation statistics released last week, from November through April, Americans drove 30 billion fewer miles than the same period the prior year. "That's the sharpest drop in recorded history, some 66 years of collecting data," says Doug Hecox, a spokesman for the Federal Highway Administration in Washington, adding that "the drop took place before the price hit $4 a gallon."

China's price hike

Initially, oil prices fell after China announced it was raising the price of gasoline by 17 percent and the price of diesel by 18 percent. Some analysts thought it would cut demand, which grew by 7 to 8 percent on an annual basis in the first quarter. But, in the last three months, demand growth has slowed to 3 percent, partly because of shortages, says Paul Ting, an energy analyst.

Now, he says Chinese refiners, although they are still losing money, might increase production somewhat. "So, we have conflicting forces, higher prices which might have some marginal impact on demand and more product available from the refiners," he says. "I think the end result will be an increase in demand, but not back to the 8 percent growth rate."

Slowing demand may be met by an increase in supply. On Sunday, Saudi oil minister Ali el-Naimi, at a special meeting of oil consumers in Jeddah, said production might increase over the current 9.7 million barrels of oil per day if the market needs extra supplies.

The kingdom had already committed to produce an extra 200,000 barrels a day starting in July on top of an additional 300,000 produced in May.

The extra Saudi production comes at a time when Iraq is also talking about adding to its capacity. Last week, the Iraqi government said its production was up to 2.5 million barrels per day, about where it was prior to the coalition invasion. On Sunday, officials also said it was awarding additional oil contracts to 41 foreign companies in the hope of boosting exports by another 500,000 barrels per day. It will be the first time the global energy companies will be back in Iraq since Saddam Hussein kicked them out in 1972.

Wire service material was used in this story.

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