A gallon of gas on track to stay below $3 this spring

With crude oil stocks high and gasoline demand low, US drivers may get a reprieve from the customary spring spike in gasoline prices this year.

By , Staff writer

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    Dawn Spiker filled up her convertible at the Costco gas station in Oxnard, Calif., in October. She paid $2.47 a gallon then. Now the national average is $2.05.
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Almost every year for the past 15, this is the week that gasoline prices begin their spring surge. But motorists may be spared this year, say energy analysts.

The reasons: A huge amount of crude oil is available for refiners, and gasoline demand remains relatively low, meaning refiners are spending more time playing dominoes than producing fuel.

“All the pieces are in place this year for it not to spike up,” says Phil Flynn, director of research at Alaron Trading in Chicago.

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If prices don’t soar this spring, that will be a departure from the past two years, when gasoline prices spurted higher as consumers fumed. In 2007, with refineries running at maximum capacity, gasoline at the pump jumped almost 50 cents a gallon, landing at $3.25. Last year, crude oil peaked at $147 a barrel, and by July some consumers paid as much as $4.11 a gallon, according to the AAA.

“It hit lower- and middle-income consumers more than upper-income people,” recalls Dennis Jacobe, chief economist at Gallup Inc. in Washington. “What you saw was that people had to reallocate their funds to gasoline and spend less on other things.”

This spring, if gasoline prices don’t spike, it will be a good thing for lower-and-middle income people, says Mr. Jacobe. “It helps to maintain spending. Whether it improves it is dubious,” he says. Gasoline prices are currently about $2 a gallon, according to AAA, almost $1.30 lower than at this time last year.

The lower prices might help some travelers this Easter weekend, a time when many Americans visit relatives. “There are a lot of intergenerational visits with grandparents having time with children,” says Geoff Sundstrom, a spokesman for AAA in Heathrow, Fla. “It’s a family holiday.”

One family planning to be on the road this weekend is the Izaks of Chicago. Jamie Izaks, his wife, and their two children will pile into the family SUV and drive 220 miles to Indianapolis to visit his parents and sister.

“I would say we’re looking at spending $100 on gasoline this weekend, and we’ll still have some gas left over,” says Mr. Izaks. “Last year, we would have spent closer to $200.”

This week in The Woodlands, Texas, a suburb of Houston, some families who plan to be on the road are taking their cars in for tune-ups and servicing at Christian Brothers Automotive, a chain stretching from Texas to Georgia.

“We are definitely seeing an influx of people who are making sure their vehicles are tuned up and ready to go for the trip to grandma's,” says Jeff Toth, owner of the local franchise. “Over the last year, people were parking the SUVs, but now we’re seeing people bringing out the family vehicles to go on the trip.”

Lower gasoline prices may be one reason consumer confidence is starting to improve.

“Our confidence numbers are showing a significant increase,” says Jacobe of Gallup. “I think the lower gasoline numbers will be a substantial help.”

At the same time, Americans will also start to see a small increase in their paychecks as a result of a reduction in federal income-tax withholding rates. Fifty-five million Americans living on Social Security or Supplemental Security Income, moreover, will get a one-time check of $250.

For gas prices to remain at these levels over the next several weeks, the Organization of Petroleum Exporting Countries (OPEC) will have to stick to its self-imposed quotas. “So far, they seem to be in a 80 to 90 percent range for compliance,” says John Felmy, chief economist at the American Petroleum Institute in Washington.

OPEC has cut production for seven consecutive months, according to news reports. However, some countries, notably Iran and Venezuela, are producing above their quotas. The price of crude oil is about $50 a barrel, up from its lows of about $40 set in February.

US inventories of crude oil are currently relatively high, at 360 million barrels – 40 million barrels higher than the average of the previous five years, according to the Energy Information Administration (EIA). However, inventories have declined slightly from this winter.

“The surplus is slowly being worked off,” says Tancred Lidderdale, an energy analyst at EIA.

Gasoline inventories are also higher than normal by about 7 million barrels. But they are also starting to come down as Americans begin to drive more. “Gasoline demand has firmed up,” says Sander Cohan, an energy analyst at Energy Security Analysis Inc. in Wakefield, Mass. “We’re getting a bump from lower retail prices.”

Despite an uptick in demand, refiners are still operating at 82 percent of capacity, estimates Mr. Cohan. “There is tons of spare capacity,” he says.

For example, diesel demand has fallen so sharply that “you have to go back to 2000” to find similar numbers, Cohan says. Only a year ago, diesel demand was so strong that it was a factor in rising prices. “Now, with industrial demand low, no more need for heating oil, and the economy in recession, there is no place for the supply to go.”

Two years ago, the price of ethanol was also booming, reflecting tight supply and demand factors. Today, ethanol prices are very low. “It’s a nonfactor,” Cohan says.

The EIA still expects gasoline prices to rise, as they do every year at this time, but not by much. The futures markets are forecasting that the price of crude oil will rise by about $6 a barrel by the end of summer, says Mr. Lidderdale.

The gasoline futures market, however, is less sanguine, forecasting an increase of five cents a gallon by summer's end. That may be too pessimistic, Lidderdale says. But, he adds, “right now we don’t expect prices to shoot up to $4 a gallon, much less $3 a gallon this year.”

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