Relief for consumers: gas prices dip

After prices soared last month, gasoline has fallen about 10 to 12 cents a gallon. Hope for summer driving?

Finally, there is some relief at the gas pump.

After April's steep climb in prices and fears that gasoline might be in short supply this summer, gasoline has actually fallen about 10 to 12 cents a gallon at the pump.

Even if prices don't continue to drop, some experts believe they will at least flatten out for the upcoming summer driving season.

If that happens, it could be good news for the slowing US economy. Only last week, the government reported that the first-quarter gross domestic product grew at a disappointing 3.1 percent annual rate. One of the reasons cited for the sluggishness was higher energy prices, which act like a tax on consumers.

"If the prices are down, it would be good news," says Richard Curtin, director of consumer surveys at the University of Michigan. "That would help the economy because consumers would not be under so much stress on their finances, especially lower- and middle-income people who don't have a lot of flexibility in how they travel."

The Fed's role

Any easing of gas prices would also help take some pressure off the Federal Reserve, which was scheduled to meet Tuesday. The Fed has been monitoring inflation, which has been ticking up, in part because of rising energy prices.

The drop in prices has coincided with President Bush's meeting with Saudi Crown Prince Abdullah. Mr. Bush, in subsequent news conferences, has said he wished he could do something to bring down the price of gasoline.

Now, of course, that's happening: According to GasPriceWatch.com, the average price of unleaded is now $2.18 a gallon, compared with a high of about $2.30 a gallon last month. This represents a drop of 5 percent. (Since mid-January, however, gasoline prices are up 37 cents a gallon, or about 20 percent.)

One of the major reasons for the fall is a large inventory buildup, says John Killduff, an oil trader at FIMAT USA, a commodities trading firm. "The markets were pricing in a supply crisis, and now it's clear gasoline prices got too high," says Mr. Killduff, who believes prices will continue to fall through the summer.

On Monday, Kuwait's oil minister told reporters that since mid-March, OPEC had increased daily production by 2 million barrels and is now pumping at a 25-year peak. Starting this month, OPEC will officially add another 500,000 barrels per day.

On Monday, the price of oil fell below $49 a barrel on the futures exchange but closed at $50.87.

"Saudi Arabian production may peak soon," says Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University in Dallas. "But their excess capacity is at an all-time low."

Not so fast

In fact, some analysts say it's too early to celebrate. Mark Routt, a senior consultant at Energy Security Analysis Inc. in Wakefield, Mass., argues that demand is continuing to rise.

Last week, consumers bought 9.31 million barrels of gasoline per day, up from 9.17 million barrels per day the week before. "I think demand climbs from here," he says.

At the same time, he says refiners are in the process of switching to summer-grade gasoline, which is used in urban areas to cut down on smog. Producing this fuel costs more money - an expense that is usually passed on to the consumer.

Only a few weeks ago, the energy markets were concerned that there might not be adequate supply for the summer. On the futures exchanges, the wholesale price of gasoline rose to $1.75 a gallon. But by Tuesday, it had dropped to $1.4965. Mr. Routt says it takes about six weeks for 90 percent of the price drop to be translated into the market.

"That argues that retail prices will continue to drop for another three weeks, and drivers will find relatively cheaper gas by Memorial Day," he says. "But I think the bad news is that demand will be so strong this summer that prices will go up."

Even a slower economy may not be enough to keep gas prices on their downward tilt, says Mr. Baxter. Even if the economy slows to a 2 percent annual growth rate, he says energy supplies will have to increase by 1 to 1.5 percent to keep prices even. "I don't see any moderate or large supplies coming onstream over the short term," he says.

But Killduff maintains that there is plenty of oil available. "Every day supplies keep rising, it helps reduce the argument for higher prices," he says.

Tuesday morning on the New York Mercantile Exchange, gasoline prices fell another 1.8 cents a gallon.

Reuters wire service was used in this report.

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