For good news, getting better, fill your car
LOS ANGELES — As he squeegees muddy film off the windshield of his 1993 Chevy Suburban SUV, Mike Wallis can barely suppress a smile.
"I was about to trade this baby in for a four-cylinder anything," says the auto mechanic and father of two. His 42-gallon fill-up at the Mobil station here will cost $61.27 (at $1.45 per gallon) compared with $88.15 (at $2.09 per gallon) just a few months ago - a nearly 33 percent saving. "But now I'm trading up to a brand new model."
The pump-price scenario is even better elsewhere across the US. Thanks to an overproduction of crude oil worldwide, a slowing economy, dramatic drops in airline travel in the wake of the Sept. 11 attacks, and the end of peak driving season, the average price of a gallon of regular $1.30, down from $1.71 in late May.
The drop in gasoline prices reflects lower prices in other forms of energy as well - natural gas and electricity - which is good news for a nation headed into winter.
Experts say prices may drop a bit more before leveling off at least through Jan. 1.
"It's really the simple fundamentals of supply and demand," says John Felmy, chief economist for the American Petroleum Institute. "All across the energy spectrum, producers have upped supply to cash in on the higher prices of recent years. Now they've done so just as consumer demand is dropping."
The biggest part of that change has been the slowing US economy, in which dwindling consumer activity has rippled through the manufacturing sector, driving down the use of all forms of energy.
Next, the increased supply of oil worldwide - a function of oil-nations as well as US producers intent on reaping rewards from the skyrocketing prices of the past 18 months - has created a glut of inventory.
When stockpiles are full and demand slows, competition between companies forces prices even lower because companies do not want to get stuck storing already-purchased supplies, whose value shrinks as it stays unbought.
Third, a domino effect. Because natural gas and electricity have followed the same pattern - oversupply driven by higher prices of the past - their prices are slumping. This, in turn, lowers the price of gasoline refining, which is dependent on both natural gas and electricity.
"The refining of gasoline takes a lot of electricity for motors and compressors, as well as natural gas for boilers and reactors," says Kevin Lindemer, a gasoline-price analyst for Cambridge Energy Associates (CEA). "When prices for those go down, they can pass the savings on to consumers."
Though energy savings have increased in all geographical regions of the country, they have not done so equally. In areas that are heavily dependent on coal, such as the Midwest and southeast -- where 80 to 90 percent of energy is coal-fired - savings are not as dramatic (nor were recent price hikes). Texas, by contrast, which is heavily reliant on natural gas, will see bigger drops, just as it saw higher spikes in the recent past.
And California and the Pacific Northwest, after the electricity crises of 2000 and early 2001, may see a bigger drop off in wholesale energy prices than other regions.
"When the energy crisis hit the West, you saw a host of contracts being made to get major users off the [energy] grid," says Joe Sannicandro, a director in the North American Electric Power group for CEA. Some of these were agreements between the Bonneville Power Administration, a consortium of producers, and aluminum manufacturers, in essence paying such manufacturers not to run their operations.
"Taking them off the energy grid has dramatically improved the supply/demand balance in the West," says Sannicandro.
There has also been a spate of electricity plant building, as well as upgrading of existing facilities.
Drops in energy prices due to oversupply are likely to remain for a while, most analysts agree. In the wake of the Sept. 11 attacks, the 10 oil-producing countries of OPEC promised to keep production high. But the group meets again in November, causing some analysts to wonder aloud how the US war on terrorism could play itself out during that time.
And on the electricity side of things, the US will continue to increase supply over demand for several years to come. In the past three years, 80,000 megawatts have come on line, more than the additional 10,000 to 20,000 needed each year. And 80,000 more megawatts are already slated for the next two to three years.
"Supply additions are greatly outstripping demand right now and the foreseeable future," says Sannicandro.
Because of this, alongside the drop in gasoline prices, many utilities in other states, which had asked for increases in the prices of home heating oil, are now seeking major rate reductions.