Good News on Gas Prices: A Sharp Drop Is Just Ahead

With security concerns in the Middle East receding and the bubble in commodities deflating, oil prices are headed sharply lower. Motorists will finally have something to cheer about: Gas prices should be about 25 cents a gallon cheaper in the next few days.

"My sense is we're going sharply lower in prices," says Tom Kloza, chief analyst of the Oil Price Information Service. "I'm not sure if it will be six days or 16 days, but six weeks from today, I suspect it will be $3.25 to $3.75 a gallon across the country."

Michael Lynch, president of Strategic Energy and Economic Research, a Winchester, Mass.-based consulting firm, says he expects gas prices to decline about 25 cents in the next week, with a target of $3.60 to $3.70 by Memorial Day.

According to the AAA, the current national average price for a gallon of unleaded regular gasoline is about $3.98, about the same as it was a week ago. A month ago it was $3.79.

A River Runs Through the Forecast

The one wrinkle that could still hold up a sharp fall in prices at the pump is the rising Mississippi River, which is flooding parts of several states, and threatens Louisiana between Baton Rouge and New Orleans. It's possible some refineries in the area might have trouble receiving oil shipments, but most analysts discount that issue.

"The market is pretty slack, so there are refineries that could come online and replace those affected by the floods," says Lynch.

The price decline is being driven by several factors. One is that the unusually high price in the last few weeks has itself caused consumers to cut back on driving. According to Lynch, demand for gasoline is down by 300,000 barrels a day, about 3% less demand than last year.

"That's a significant decline," Lynch says. "When you have this kind of run up, you do see consumers start to respond."

At the Top of an Annual Cycle

Kloza says that at the same time, the speculation in oil seems to have been cooled by investors' realization that there are adequate supplies.

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"The truth is oil prices are very tidal, and there is always a high tide that tends to occur around May 5," Kloza says. "This year it was probably a little higher than normal."

Many investors were also expecting the turmoil in Libya to spread to Persian Gulf countries, notably Saudi Arabia after demonstrations in nearby Bahrain, but those upheavals didn't materialize. There have also been a series of unlucky setbacks at U.S. refineries, including power failures, storms and maintenance issues.

Kloza noted that the combination of problems drove up crude oil prices to $115 a barrel domestically and $130 in world markets. That number has recently come down by about $15 a barrel.

"It's more than a drift lower," Kloza says. "Once we get through this notion of possible flooding, it's sharply lower at the pump." The trend will be sharpest in California and other Western states which were the first to feel the sharp increases, he says.

Lynch says he expects to see gas prices sink lower throughout the summer and probably end it below $3.50 a gallon.

The sharp drop will be a help to hard-pressed consumers just as the summer driving season begins. It will also give a needed shot in the arm to the lackluster recovery, which has been dragging at least in part due to high energy prices.