Falling oil prices likely to miss the gas pumps

<a href=www.billingsgazette.com>But don't expect the reprieve to last for long. By SARAH HALE The Orlando Sentinel

A more than week-old decline in crude-oil prices, which started even before the United States attacked Iraq, is expected to trickle down eventually to consumers in the form of lower gasoline prices.

But don't expect the reprieve to last for long.

Oil prices have fallen about $12 a barrel, from about $38 to $26, in just the past 10 days, and energy experts predicted Friday that prices will continue to spiral downward. The days of crude hovering just below $40 a barrel have passed, they said.

$25 a barrel oil? "It's fair to guess we'll fall back to $25 and, barring another event, that's where we'll stay," said Fred Rozell, retail-pricing director with OPIS Energy Group, a research firm in Lakewood, N.J.

But while gasoline prices tend to mimic changes in the cost of crude oil - which accounts for about 40 percent of the total cost of a U.S. gallon of gasoline - other factors are likely to blunt any drop in prices at the pump.

Even as the price of gasoline falls in the wake of war, seasonal adjustments in fuel formulas, cyclical driving trends and the possibility of supply shortages are likely to force prices upward again. Ongoing problems in oil-producing countries such as Nigeria and Venezuela could further hurt supply and pinch distribution. Iraqi retaliation against oil-production facilities in Kuwait or Saudi Arabia also is still a possibility as the war intensifies, experts said.

"Whether crude is going up or down, the price is essentially - but not immediately - passed on to consumers," said James L. Williams, president of WTRG Economics, an energy-economics firm in London, Ark.

"We can expect gasoline costs to drop in the coming month. But - and this is a big, wide 'but' in capital letters, bold - there are just so many variables in this tight energy situation that we could see prices go back up in almost zero time."

OPEC action In an attempt to calm worried markets, the Organization of Petroleum Exporting Countries announced Thursday that its members had pledged to increase their crude-oil output in an effort to make up for any disruption in exports from Iraq - about 2 million barrels a day.

However, Williams said OPEC is operating nearly at capacity already, so there is very little "wiggle room" should something unexpected occur on the supply side.

The worldwide oil market currently consumes 75 million barrels a day, or about 98 percent to 99 percent of what's being produced, he said.

With the United States' busiest driving season about to shift into high gear, rising demand for gasoline could soon offset any savings from lower crude-oil costs.

Last year, for example, the average price for regular gasoline in metro Orlando, Fla., started off at little more than $1 a gallon, only to climb by mid-April to $1.47 a gallon, according to OPIS. It then averaged about $1.40 through August as oil companies sought to capitalize on the usual upswing in summer vacationers hitting the road.

"Gasoline prices tend to go up as the summer approaches," said Bruce Cavella, an oil-industry analyst with Global Insight Inc. in Lexington, Mass. "There's more consumer demand as people go on vacations."

Even if gasoline prices fall by 10 cents or more a gallon in the next several weeks, they will likely head right back up again.

"We're looking at the $1.70-a-gallon range again," OPIS' Rozell said.

The U.S. average for regular gasoline dropped a half-cent to $1.71 Friday.

In addition to seasonal driving trends, refineries make adjustments each spring and fall to the gasoline mixtures they produce, which can lead to higher prices in some circumstances.

By May 1, for example, U.S. refineries must switch from winter-grade to summer-grade gasolines, depleting inventories and cleaning out pipelines, a process that can take two weeks or more.

Because the United States consumes more gasoline in the summer, it is important that the refineries overstock on oil ahead of time to compensate. But "refineries are expecting lower crude prices," said Williams, of WTRG Economics. "They don't want to get caught with overstock that's too expensive and have to sell it at a smaller profit margin."

And because refineries have been conservative in their purchasing strategies, inventories are already low, he said.

Should inventories fall below necessary levels, the U.S. government has reserves that could be used to relieve some of the pressure. The Department of Energy says nearly 600 million barrels of crude oil - about 7 percent more than a year ago - is currently stored in underground facilities as the nation's strategic petroleum reserve.

Nigeria, the world's eighth-largest oil exporter, is experiencing serious disruptions to its oil supplies amid ethnic warfare in the Niger Delta, where production equivalent to some 315,000 barrels a day has now been shut down.

Fighting between Ijaws and rival Itsekiri have claimed the lives of 10 soldiers and scores of civilians, prompting the deployment of thousands of soldiers and the evacuation of oil workers from threatened facilities.

In Venezuela, the world's fifth-largest oil exporter, a nationwide strike earlier this year sharply curtailed oil shipments that have yet to return to normal levels.

Although the Venezuelan government is trying to rebuild its oil industry, opposition to President Hugo Chavez is ongoing. The country is now exporting about 1.8 million barrels a day - a little more than half of what it was producing a year ago.

"In August - during the peak of our driving season - the Venezuelan constitution allows for a recall vote for Chavez's position," Williams said. "The probability for armed conflict goes up."

"Bottom line: As gas prices begin to drop, enjoy them," said OPIS' Rozell. "Prices may stay low in the short term but will likely increase."