Motorists Get Temporary Reprieve as Soaring Gasoline Prices Shift Into Reverse

By Jason Simpkins
Associate Editor

Despite recession fears and a temporary pullback in the price of oil, gasoline prices will likely tease record highs even before the summer driving season kicks back into gear.

The price of crude oil accounts for more than 55% of the retail price of gasoline, according to the federal Energy Information Administration. So it came as no surprise that - as oil breached the $100 a barrel mark earlier this month - gas prices soared up over the $3.00 a gallon level.

However, fears of a recession and slumping demand slowly weighed on oil prices, and gasoline followed suit. The Lundberg Survey, which tabulates the prices at about 5,000 gas stations across the country, found that average retail gas prices have fallen 9.43 cents a gallon in the past two weeks. The price of gas had risen in each of the three prior weeks.

Survey Publisher Trilby Lundberg attributed the decline to sagging oil prices and shrinking profit margins among refiners and retailers. But Lundberg doesn't think that prices will fall much further.

"Retail gasoline prices will probably hover around this level - just under $3 per gallon - for perhaps up to a month," she predicted. And even if oil prices don't rise during that time, "there will be big pressure on gasoline prices to go up because our spring demand will pull it up."

Even though supplies are sufficient to meet demand, "When consumers soak up that extra supply, prices will stop falling and be on the rise, possibly to a dramatic degree," Lundberg added.

While slumping consumer spending and rising unemployment will threaten demand for both oil and gasoline, it's likely that the Organization of Petroleum Exporting Countries will scale back its production over the next few months as evidence of an economic slowdown continues to emerge. For that reason, few analysts believe gasoline will drop much further than $2.50 a gallon, from its current price around $3.00.

In the short term, fears of a slowing economy, or even an outright recession, could cause gas prices to fall and range between $2.50 and $2.80 over the next few weeks, Tom Kloza, chief oil analyst at Oil Price Information Service, told CNNMoney.

But after that, Kloza expects gas prices to surge again to reach a new record of more than  $3.22 a gallon in the Spring, whether there is a recession or not.

"The same things that make the rally every spring are still there," he said.

That includes a drop in inventories as refiners switch to summer blends, and increased demand heading into the heavier summer driving season.  Also, a lack of refining capacity is beginning to take its toll, as there hasn't been a refinery built in the United States in roughly 30 years.

Nor is it likely that OPEC will come riding to the rescue, either. Crude oil hit $100 a barrel earlier this month, but the price has slipped significantly since, as the strength of the U.S. economy begins to wane.

And as U.S. Federal Reserve Chairman Ben S. Bernanke and central bank policymakers issued an emergency three-quarter-point rate cut a week ago (Jan. 22) and the stock markets sputtered, the price of oil dropped to a low of $86.11, before settling at $89.85 a barrel on the New York Mercantile Exchange.

OPEC doesn't want prices to rise so high that it weighs down global growth and further erodes demand, but if it increases its output - and the world economy stalls anyway - oil prices could collapse.

The bottom line: OPEC will continue to maintain that bottlenecks in refining, a falling dollar, and speculative investing are the reason for high oil prices, not a lack of crude. An Energy Department report released today shows that U.S. crude inventories rose in the week ended Jan. 25 rose 1.8 million barrels.

Additionally, the average price OPEC charges for oil has dropped in each of the past three weeks. After hitting a record high of $93.78 a barrel Jan. 3, the price has dropped to $85.07 per barrel, according to Xinhua, the state-run China news agency.

Given that global growth is going to slow anyway - and the cartel's profits already are destined to shrink - it's unlikely that OPEC will open up its spigots. And given that OPEC provides the world with 40% of its oil, that will affect crude oil prices.

The leaders of OPEC-member nations are set to next meet in Vienna on Friday.

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