Why Gas Prices Are Falling in Time for Labor Day Travel

Gas Prices Falling in Time for Labor Day Excursions
Gas Prices Falling in Time for Labor Day Excursions

Just when many families have opted for "staycations" instead of traveling for the Labor Day weekend because of the lousy economy, they're finally catching a break on gasoline prices. Fuel is at its second-lowest level in five years, and some economists predict that it could drop much further in the months ahead.

The U.S. Energy Department said Wednesday that the average price of gas in the country was $2.68 a gallon, the least of this summer driving season. Only last year's $2.59 a gallon was lower in the last five years, the department said.

The main reason for the price drop has been the huge run-up in domestic petroleum inventories. U.S. crude oil supplies are at the highest level for August in nearly 20 years, and total petroleum stocks, including gas and other products, are at their highest level since January 1983, the department reports.

Because of the abundance of oil on the global market, it has been trading in a relatively narrow range for the past several months. Light-sweet crude futures (/CL\V10) closed at $71.92 a barrel on the New York Mercantile Exchange on Tuesday before jumping during Wednesday's stock market rally to nearly $74.

"Market Fundamentals Are Pretty Awful"

Michael Lynch, president of Winchester, Mass.-based Strategic Energy & Economic Research, says crude prices are likely to come down to $60 a barrel by year-end. The only thing boosting prices, Lynch says, is that central banks around the world have been putting a lot of money into the financial system, and some of that has flowed into commodities like oil, supporting the market.

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Another factor keeping prices from dropping further is the hurricane season, which peaks on Sept. 10. Serious storms could disrupt production in the Gulf of Mexico and supplies on the East Coast, driving up prices temporarily. "After that, you start seeing the fact that market fundamentals are pretty awful," Lynch says.

He's even forecasting a greater decline in prices over the next one or two years. That's because at $70 a barrel, the price of crude is three times its historical norm. Lynch says petroleum is likely to drift down to around $40 a barrel as the market sees a reversion to this norm.

Lynch maintains there's only an indirect connection between oil prices and the GDP growth rate in the U.S, which has fallen in recent months after rising earlier in the year. Lynch notes that the U.S. just experienced a recession during which oil prices remained relatively high.

Speculators Have Limited Influence

Some market experts believe that financial speculators have also kept crude prices higher than they would be naturally if only market supply and demand conditions were setting them. Over the last 10 years, investors have piled into exchange-traded funds like the United States Oil Fund (USO), which invests in oil futures as a proxy for price swings in West Texas Intermediate crude.

Lynch disagrees. "It's an influence, but it's not a huge influence, because if people thought the price was being held up by speculators, they would short the market and bring the price down," he says.

The International Energy Agency on Wednesday released 30 years of energy statistics that dramatically show the changing pattern of world energy production and consumption.

China, for example, accounted for just 7.9% of total world consumption in 1973, but in 2008 it hit 16.8%. The rest of Asia also nearly doubled its fuel use, while the industrial countries in the Organization for Economic Cooperation and Development saw their share of world consumption decline from 60.1% to 43.8%.