Watch Out For Falling Gasoline Prices

The failure of oil-producing nations to agree this week on boosting output sparked worries that the price of crude and gasoline could be headed higher again.

But a number of oil industry watchers think those worries are misplaced.

“Right now the real story is not so much what's happening in Vienna,” where OPEC leaders met, said Nansen Saleri, CEO of oil reserve adviser Quantum Reservoir Impact. “The real story is what's happening in Libya and what’s happening in the global economy, particularly in the U.S.”

For U.S. drivers, the real story is that pump prices are falling for several reasons.

First, demand has fallen. At $4 a gallon, drivers have figured out how to cut back — either by driving less or switching to more fuel-efficient cars and trucks. Despite fears of possible tight supplies of crude, there are ample inventories of gasoline to last through the summer driving season. Prices are already retreating from the $4 mark.

Falling oil prices get much of the credit. Crude prices had already begun falling well before this week’s public display of disaffection among the world’s biggest producers.

Since peaking at around $127 a barrel in April, oil prices have backed down by about $15 even after this week's modest increase.

Much of the spring price surge followed the outbreak of revolution across the Arab world including the loss of production from embattled OPEC member Libya. But despite the loss of production, oil is still plentiful. In the U.S., oil stocks are well above their five-year average for this time of year.

The Libyan civil war also raised fears that unrest could spread to Saudi Arabia, disrupting output by the last producer with meaningful spare capacity. But as those fears have eased, so have oil prices.

“One can argue there are still risks everywhere else in the Middle East, including Saudi Arabia,” said Saleri. “But they have a set of circumstances that make them far, far more stable and very different than the rest of the countries in the oil-producing region.”

The Arab spring has clearly rattled OPEC. This week’s meeting highlighted a major rift in the cartel, with Iran arguing against raising output and Saudi Arabia arguing for it. Though OPEC has long been plagued by internal squabbles, they are typically papered over with a formal statement of unity. So the public display of acrimony was unusual.

"This is one of the worst meetings we have ever had," Saudi oil minister Ali al-Naimi said after the meeting broke up not long after it started.

On Friday, Saudi newspaper al-Hayat reported that Saudi Arabia planned to raise output to 10 million barrels a day in July, from 8.8 million bpd in May. There was no indepedent verification of the story.

Oil prices may have shown little impact even if traders had gotten the production increase they expected. With many OPEC members already cheating on production quotas, OPEC’s actual output is running about 1 million to 2 million barrels per day above the official target. Production hawks like Iran and Venezuela — who opposed calls from the Saudis for higher production — face ruinous revenue shortfalls if they hold back oil supplies.

“Even those members who voted against (raising production) may be tempted to take advantage of higher prices and allow their compliance to slip further,” said Julian Jessop, who follows the oil markets for Capital Economics.

In any case, efforts to raise production fall squarely on the Saudis, the only country with significant spare capacity to add to global supplies. And contrary to popular belief, the Saudis are just as worried when oil prices rise too high as when they fall too far.

“They're all about stability and the long-term marketplace because, after all, the Saudis only export one thing,” said Addison Armstrong at Tradition Energy. “They have only one source of revenue, so they don't want anything to mess around with it. They want to be on this gravy train as long as possible and stability of price is the key to that.”

So as the world’s largest producer, Saudi Arabia has the most to lose from the recent surge in oil prices, which has only served to accelerate global efforts to use less Saudi oil.

Higher oil prices have sparked a major shift in car buying habits, for example. U.S. car dealers last month reported continued strong demand for smaller, fuel efficient vehicles. General Motors is considering adding a second shift to the Detroit plant that makes the electric Chevy Volt. Ford said Friday it plans to triple production of electric cars by 2013.

Oil prices above $100 have spurred production of alternative sources of oil that cost more to produce, from Canadian tar sands to ever-deeper offshore oil fields. Exxon Mobil said this week it made two big new deepwater oil discoveries in the Gulf of Mexico in an area thought to hold as much 15 billion barrels of crude.

Domestic oil finds that were once considered too costly to produce are now being developed profitably with production techniques like steam injection and fracking, which cracks open rock formations deep underground to get at the crude.

Those techniques have also produced something of a modern-day boom in U.S. natural gas production, pushing prices lower and making it much more attractive as an alternative transportation fuel.

Gulf Oil, a major gasoline retailer, is among the companies looking to expand the use of natural gas for transportation, according to CEO Joe Petrowski.

“So from a demand standpoint, there's a lot of destruction going on of petroleum demand for the first time I’ve seen in a long while,” he said. “People are not just talking about it but putting pencil to paper and looking to use less petroleum-based fuels.”

In the U.S., gasoline demand has fallen by roughly 5 percent since this time last year; prices recently backed off after peaking at about $4 for a gallon of regular.

Petrowski is among those who think pump prices are headed lower: He sees prices at $3.50 or below by July 4.

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  • by Puh-Leez Location: Vanceboro on Jun 12, 2011 at 04:25 PM
    This whole discussion is meaningless and just causes a migraine to set in.....
  • by jerry Location: enc on Jun 11, 2011 at 07:04 PM
    Smoke and mirrors from the politicians. They all are getting rich from us. Don`t matter which party, we are the dumbells and it will not change until there is public funded elections and term limits for the thieves!
    • reply
      by Fact Bringer on Jun 11, 2011 at 09:38 PM in reply to jerry
      I couldn't agree more, jerry.
  • by Citizen Location: Greenville on Jun 11, 2011 at 11:22 AM
    Hey common sense, here's an economics lesson for ya. We buy a huge amount more oil than europe does. Do you think that when you buy your iphone or ipad or other item from best buy that you are paying the same price that a distributor is paying? NO. It's because the distributor can move way more product so they get it at a discount, and the manufacturer still wins due to the larger amount of total profit made by moving so much product. Get a clue and comment back when you have it.
  • by Anonymous on Jun 11, 2011 at 11:21 AM
    This has been clear since the beginning of the Obama administration. Don't you remember Rush Limbaugh, "I hope he fails"? You can site any number of examples to back this assertion up: from outright lies (death panels and birthism) to flip-flops (Trump on raising taxes, Newt on Libya, McCain on just about everything) to threats of fillibusters and holds on nominations in the Senate. If Republicans care about the economy, why have they tried to link social issues to the budget? Why haven't they proposed cutting the Pentagon budget? How could they possibly even thought about shutting down the government and throwing 800,000 people out of work? How can so many of them continue to support earmarks (Boehner's second engine)? How can they say they want to balance the budget but continually put roadblocks in every honest effort to do so (such as refusing to close tax loopholes that benefit Big Oil).
    • reply
      by Fred on Jun 11, 2011 at 09:26 PM in reply to
      To Anonymous on Jun 11, 2011 at 02:21 PM You say " (Boehner's second engine)? How can they say they want to balance the budget but continually put roadblocks in every honest effort to do so (such as refusing to close tax loopholes that benefit Big Oil)." What? -- You must enjoy Hussein's gas price today when you can only afford to fill up a 1/2 a tank gas! There is no loopholes? Pay Obama's price at the pump!
  • by Wolfgang Location: Chocowinity,NC on Jun 11, 2011 at 09:25 AM
    The artical make no sence. First it says gas prices are going down? Then it says gas prices are going up? I bet it won't drop to $1.61 a gallon the day G W Bush left office. The gas price today is around $3.70 a gallon. That is about a 130% increase since the day Bush left office. Seems Obama wants his Muslim buddies to get rich on us. Besides the gas price it does not look good for Demorats. Although they are tremendously corrupt and embrace socialism, they are not stupid. They have to realize buy now Obama is going to get his buttocks kicked all the way back to Chicago in 2012 and take a whole lot of them Demorats with him next year. Watch for more and more Demorats to start openly criticizing Obama in the next few months
    • reply
      by Anonymous on Jun 11, 2011 at 11:46 AM in reply to Wolfgang
      Yeah, gas was cheaper the day George Bush left office. But nobody had a job, the stock market was wrecked, and the nation was already bankrupt. I'd rather pay a little more for gas than go back to ANYTHING the way it was when Bush was Pres.
      • reply
        by Woody on Jun 11, 2011 at 01:13 PM in reply to
        Nice spin Anonymous but no facts. But nobody had a job? With GW Bush the unemployment rate was adveraged 5%. Bush's stock Dow high was 14,000 points. Obama unemployment 9-10% doubles that of Bush. Dow drops on negative economic news June 1, 2011 4:27 PM Negative economic reports on jobs and the housing marking led to a panicked sell off in the stock market. Anthony Mason reports on the Dow's worst one-day point drop in a year. Obama's Dow went under 11,000 points on friday 6-9-2011. We miss you G W Bush
        • reply
          by Anonymous on Jun 11, 2011 at 05:15 PM in reply to Woody
          Woody, are you on crack? Unemployment was trending UP before Obama took office, all the examples you just posted were also treading in those directions BEFORE Obama. Do you realize how difficult and timely it will be to stop, more less reverse the Bush trend?
      • reply
        by Rhonda on Jun 11, 2011 at 04:33 PM in reply to
        Anonymous if you like paying Obama's high gas prices now. I bet you will even like it more at $5.00 a gallon.
  • by Headlines? on Jun 11, 2011 at 08:03 AM
    Watch Out For Deceptive Headlines
  • by Anonymous on Jun 11, 2011 at 05:58 AM
    Been to the grocery store lately? Have you tried to buy health insurance? Best place for all of us is prison. Safer than our streets, 3 GOOD meals a day, nice air condition in the summer, plenty of heat in the winter, best medical care the tax payers can buy. All the books and education you could want. And you don't have to worry about driving anywhere. No work, no worries. Not a bad deal. I might retire sooner than I thought.
    • reply
      by loller on Jun 11, 2011 at 09:37 PM in reply to
      You tried to buy health insurance at the grocery store? You must be from eastern nc.
  • by Zzyzx Road Location: Pitt County on Jun 11, 2011 at 04:28 AM
    When China (who probably owns us by now) says we are going into default on our debt, expect gas prices to go nowhere but up. Anything else is just window dressing to score political points; if there are any to be gotten at this point.
  • by Clifton Location: Washington on Jun 11, 2011 at 04:27 AM
    When demand causes the price of gas to rise that is PRICE GOUGING. It is no different than plywood and two by four prices skyrocketing just before a hurricane. Oil execs NEED to go to jail a few times for this and they will stop playing games with Americans.
  • by paranoid Location: coast on Jun 11, 2011 at 03:37 AM
    Does anyone else think it is strange and funny odd that as we get closer to 2012 and elections that gas prices start dropping. Like all of a sudden someone somewhere wants Obama to get the credit for this ending. I agree with anon that with the sucky situations there will be less demand.
    • reply
      by Anonymous on Jun 11, 2011 at 11:19 AM in reply to paranoid
      Also seems funny as it gets closer to 2012 unemployment starts to rise, along with everything else, looks like some higher up people wants the economy to fail....on wait, didn't someone state they will do anything to ensure Obama fail, that includes destroying the economy for their own personal gain and comtrol.
      • reply
        by AMD on Jun 11, 2011 at 01:40 PM in reply to
        You just described what the Democrats did when they took control in 2006. Seems like you cant remember that can you? Look at the timeline. The economy was strong, gas prices were low, unemployment was low, the housing market was at an all time high, so was the stock market and along come the Democrats and destroy everything. Do you think they had the same motive that you just described the Republicans as having?
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