Gas-price decline provides fuel for a sluggish economy

The Christian Science Monitor from the May 12, 2003 edition

Consumers may pay an average of $1.46 at the pump over the summer, freeing up money to be spent elsewhere.

By Ron Scherer | Staff writer of The Christian Science Monitor

NEW YORK – After rising all winter, gasoline prices are ratcheting lower. Since the start of the Iraq war, prices at the pump have fallen about 21 cents a gallon. For Americans who drive, this is the equivalent of getting a tax cut of about $200, assuming that gasoline prices don't go back up again. The lower prices have arrived just before the official start of the driving season - Memorial Day weekend.

Lower energy prices are one of the bright spots in the economy. Economists believe the combination of lower mortgage rates and cheaper gasoline could increase consumer spending by as much as 1 percent over the next six months.

The good news will help the balance sheets of the beleaguered airline and trucking industries, both of which are large consumers of fuel. And, it will help the Federal Reserve keep a handle on interest rates since it reduces the US spending on imported oil by about $40 billion - part of the trade deficit that won't need to be financed.

"This is good news for gasoline consumers, they can spend the money on something else," says John Felmy, chief economist for the American Petroleum Institute in Washington. "It's good news overall for the economy."

Although gasoline prices vary around the nation, as of Tuesday, the Energy Information Administration found the average price for unleaded gasoline was $1.51. However, prices are in the region of $1.20 in Georgia; in California they are as high as $1.93 a gallon.

Even so, these prices are well off the highs set in March, when the national average for gasoline was $1.73 and was well over $2.00 a gallon in California.

Prices have retreated despite the fact inventories - both crude and refined - are lower than normal. This is the result of the cold winter and the supply cut offs from Venezuela, Nigeria, and Iraq.

Now, Venezuelan production is heading back toward capacity and there are efforts to resolve disputes in Nigeria between the oil companies and its workers. Last week, a government report showed US crude inventories lower than expected - something that helped prices rise.

Because there have been so many disruptions, energy price forecasters are leery about how much further prices can fall.

"There could still be some problems with refineries or some kind of pipeline disruptions that could cause prices to go back up again," says Dave Costello, a forecaster at the US Energy Information Administration (EIA).

In fact, last month the EIA said consumers could expect "limited" price relief this summer. Since then, however, gasoline prices have declined for seven consecutive weeks. On Thursday, this prolonged drop prompted the government agency to revise its forecast. It now expects gasoline prices to average $1.46 during the summer season. This would be less than 10 cents a gallon higher than last year but well below the summer of 2000 and 2001.

Behind some of the uncertainties over price are questions about crude-oil supplies. Before the Iraq war, Saudi Arabia increased production to stabilize soaring prices.

Now, the Saudis as well as the rest of OPEC, are talking about cutting back. OPEC will meet in Doha on June 11 to discuss production quotas. On Friday, oil prices rose slightly after an OPEC official told the French daily Le Monde that there might be a need to cut output further in June.

Oil analysts are also uncertain about the timing of production from Iraq. Before the war, Iraq was producing about 2.5 million barrels per day. Now, the US is pressing the United Nations to allow Iraq to start up production again.

"This would have a negative impact on prices because it would be seen as additional supply," says Mike Fitzpatrick of Fimat USA, an energy trading group.

Most Americans are just glad to see prices fall. So far, demand for gasoline has been very brisk, despite the fact that the economy is sluggish and the vacation season has not started yet.

This is partially because of the increased use of SUVs and light trucks, which get a lower gasoline mileage.

But it's also because gasoline has become an indispensable commodity for many Americans. Last month, the American Automobile Association conducted a survey asking if consumers adjusted their driving based on price.

"About 75 percent said they had not changed a thing," says Geoff Sundstrom, a spokesman for the Heathrow, Fla.-based organization. "For many Americans you either drive the car or you don't go."

That's the case in Boise, Idaho, where people drive long distances every day. "Gas prices hit working families really hard because there aren't any alternatives," says Mary Smith a homemaker in Boise, Idaho. "It is a big deal to poor or working-class families. They have to commute to work."

One of those families is Heather and Matthew Longhurst, an electrician, and their eight-month-old daughter. They had budgeted $100 a month for gasoline for their two cars. In January, they actually spent $138.

Last month, they noticed the price had come down. "It will help - we're saving up for a million things," says Ms. Longhurst, a property manager.

• Stacey Vanek Smith contributed to this article.