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As Oil Slides, Drivers Await Relief

July 18, 2008

What goes up can come down. Even oil prices.

Crude oil prices plunged more than $5 a barrel Thursday, the third straight day of falling prices and the first time in more than a month crude has dipped below $130 a barrel.

But consumers shouldn’t celebrate yet. It will be weeks before gas prices follow suit, and a bad turn of events like a skirmish in the Middle East or more disruptions in Nigeria’s oil fields could reignite rising oil prices.

But since oil futures have dropped almost $18 from last week’s record high of $147.27 a barrel, you might be wondering if we’ll ever get a break at the pump.

Generally, every $1 change in the price of crude moves the price of gasoline by 2.5 cents a gallon, said Pavel Molchanov, an energy market analyst with Raymond James.

But the price cut at the pump this time might be smaller because refineries and gasoline retailers had absorbed some of the past increases in crude oil and now they want to take advantage of the reduction in their costs to make up the difference, Molchanov said. “This tends to happen with a lag of six weeks or so,” he said.

George John, a marketing professor at the Carlson School of Management, said most gas stations are run on thin margins as independent businesses and uncertainty about crude oil makes them hesitant to drop prices too quickly. Most of their profit comes from sales of snacks and cigarettes, and high gas prices haven’t helped them there either this year.

“Because gas prices are so high, people are stunned when they read the gauges, and that puts them in a pretty foul mood,” John said. “And when they’re like that, they’re not in the mood to pick up a doughnut too.”

The average price of a gallon of regular unleaded was about $3.97 in the Twin Cities Thursday, according to AAA. It was $3.20 a year ago.

Consumers have the impression gas prices rocket up immediately when oil prices rise but drop slowly when crude falls, but gas prices do tend to follow the oil market relatively quickly, said John.

Minnesotans, like the rest of the nation, have been reducing their driving to save money. Drivers reduced the miles they drove by 4 percent year-over-year in April, the latest highway data available from the Minnesota Department of Transportation.

Meanwhile on the commodities markets, despite this week’s price slides, oilmen believe the price trend will continue upward.

“I think this (week) will be a blip in the real long-term bullish trend,” said Ryan Gilbertson, chief financial officer for Northern Oil & Gas Co., a Wayzata company that leases land and helps drillers look for oil in North Dakota. He thinks higher prices are here to stay.

AAA of Minnesota and Iowa spokeswoman Gail Weinholzer said even if oil were to drop to $100 a barrel — which is not very likely if you listen to analysts like Molchanov — gasoline would still be expensive. At $100 a barrel earlier this year, gas in the Twin Cities metro area cost about $3.50 a gallon, she said.

But when the summer driving season ends in September and refineries switch to a winter blend of gas, that should knock off anywhere from a nickel to a dime a gallon, Weinholzer said.

John, the marketing professor, advises consumers to continue to drive less given the uncertainty about prices. “You’ll be spending maybe $75 instead of $80 to fill up,” he said. “Go spend the extra $5 on a doughnut if you want.”

Bloomberg News contributed to this report.




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