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Relief at pump: gasoline below $2 a gallon

Prices have dropped by half in a few months, and could go lower still.

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"The economics of gasoline and the family budget is not limited to the cost of an individual trip," says Geoff Sundstrom, a spokesman for AAA. "What is more important is, What does the family's gasoline credit card look like at the end of the month?"

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Still, the price decline could definitely be beneficial. The typical consumer spends about 18 percent of his or her money on transportation-related costs, estimates the American Institute for Economic Research (AIER) in Great Barrington, Mass. Of that 18 percent, about 28 percent is spent on gasoline and motor oil.

When gasoline was $2.94 a gallon, it cost about $6,320 to operate a small sedan 15,000 miles. The drop in the gasoline price reduces that to about $5,730 – a savings of $590, calculates AIER.

For now, however, Americans seem to have cut down on their driving considerably. Gasoline consumption is down about 5 percent, or 500,000 barrels per day, says Sander Cohan, an oil analyst at Energy Security Analysis Inc. in Wakefield, Mass.

"People are still in a conservation mode. They are feeling poor," Mr. Cohan says.

Demand is dropping so quickly that US refiners can barely cut production or prices fast enough. In fact, for the first two weeks of November, the oil industry is losing $6 for every barrel of gasoline it sells, according to Cohan. "This translates into a loss of about 14 cents a gallon on every gallon they sell," he says.

At the pump, this has translated into some amazing sights. For the week of Oct. 13, gasoline prices fell 33.3 cents a gallon. The following week, they were down another 23.7 cents a gallon.

"Prices are often falling 5 cents a day," says Jeff Lenard, a spokesman for the National Association of Convenience Stores in Alexandria, Va.

While refiners are lowering their prices, gasoline retailers are now increasing their profit margins, Mr. Lenard says. "The [profit] margins that are slim to negative when prices are rising expand on the way down. So it gives retailers a chance to catch up," he says.

The drop coincides with the onset of winter, when driving starts to fall anyway. By February, Cohan says he would not be surprised to see prices down to $1.75 a gallon. "How far gasoline falls depends on how far crude [oil] bottoms out," he says.

On Wednesday, the price of crude was $54.11 a barrel. Some press reports cited predictions that oil could bottom out at $40 a barrel. The last time crude oil was that low was 2004, when gasoline was in the $1.50-per-gallon range.

It's unlikely to get that low again because of new blending components, Cohan says. And by early spring, prices will be moving back up again, he says. "They should start to ramp up in March," he predicts.