Relief at pump: gasoline below $2 a gallon

Prices have dropped by half in a few months, and could go lower still.

Here's something to be grateful for: This Thanksgiving, the price of gasoline is expected to be below $2 a gallon. Some analysts foresee pump prices as low as $1.75 a gallon this winter.

The average US price of a gallon of regular is now $1.99, according to GasPriceWatch.com, a price-tracking firm. The last time gasoline prices were this low was March 2005.

Since July, the price of fuel has dropped by half, cutting the cost of filling up a family sedan's 13-gallon tank by about $26. The savings could help strained family budgets – perhaps giving a household that has two cars an extra annual income of $2,400, if current prices hold.

"Dropping energy prices are the only economic ray of sunshine," says Mark Zandi, chief economist at Moody's Economy.com. "Every penny decline in the price of gasoline saves the American consumer [collectively] $1 billion over a year."

It's not just gasoline prices that are falling. Home heating oil is down $1.60 a gallon from its peak of $4.53 a gallon in July. And it's down 26 cents a gallon compared with a year ago. Natural gas, meanwhile, is down 33 percent from its peak this summer of $20.19 per thousand cubic feet. Reflecting these lower energy and transportation costs, some food goods are also less expensive.

On Wednesday, the falling prices resulted in a 1 percent decline in the Consumer Price Index – the steepest drop since the government started keeping records in 1947. Even if food and energy prices are excluded, consumer prices still fell, dropping 0.1 percent. It was the first decline in "core prices" in 25 years.

"If you look economywide, if these prices were sustained, it would save consumers $200 billion on their commodity bill in 2009," Mr. Zandi says. "That would be a significant and helpful savings."

But at the moment, less-expensive gasoline is not enough to pull the economy and the consumer out of the doldrums caused by falling home prices, eroding stock-market portfolios, tight credit, and a bad job market.

"It remains to be seen if lower gas prices will filter on through to consumer confidence since there are other competing issues," says Lynn Franco, director of the Consumer Research Center at the Conference Board, a business research organization in New York. "There seems to be a wait-and-see attitude among consumers, and there might be some skepticism about how long this decline in gas prices can last."

In fact, despite the lower gasoline prices, AAA, the national driving organization, released a poll on Tuesday that found for the first time since 2002, the number of people traveling for Thanksgiving would decline. This includes 1.2 percent fewer people traveling by car.

"The economics of gasoline and the family budget is not limited to the cost of an individual trip," says Geoff Sundstrom, a spokesman for AAA. "What is more important is, What does the family's gasoline credit card look like at the end of the month?"

Still, the price decline could definitely be beneficial. The typical consumer spends about 18 percent of his or her money on transportation-related costs, estimates the American Institute for Economic Research (AIER) in Great Barrington, Mass. Of that 18 percent, about 28 percent is spent on gasoline and motor oil.

When gasoline was $2.94 a gallon, it cost about $6,320 to operate a small sedan 15,000 miles. The drop in the gasoline price reduces that to about $5,730 – a savings of $590, calculates AIER.

For now, however, Americans seem to have cut down on their driving considerably. Gasoline consumption is down about 5 percent, or 500,000 barrels per day, says Sander Cohan, an oil analyst at Energy Security Analysis Inc. in Wakefield, Mass.

"People are still in a conservation mode. They are feeling poor," Mr. Cohan says.

Demand is dropping so quickly that US refiners can barely cut production or prices fast enough. In fact, for the first two weeks of November, the oil industry is losing $6 for every barrel of gasoline it sells, according to Cohan. "This translates into a loss of about 14 cents a gallon on every gallon they sell," he says.

At the pump, this has translated into some amazing sights. For the week of Oct. 13, gasoline prices fell 33.3 cents a gallon. The following week, they were down another 23.7 cents a gallon.

"Prices are often falling 5 cents a day," says Jeff Lenard, a spokesman for the National Association of Convenience Stores in Alexandria, Va.

While refiners are lowering their prices, gasoline retailers are now increasing their profit margins, Mr. Lenard says. "The [profit] margins that are slim to negative when prices are rising expand on the way down. So it gives retailers a chance to catch up," he says.

The drop coincides with the onset of winter, when driving starts to fall anyway. By February, Cohan says he would not be surprised to see prices down to $1.75 a gallon. "How far gasoline falls depends on how far crude [oil] bottoms out," he says.

On Wednesday, the price of crude was $54.11 a barrel. Some press reports cited predictions that oil could bottom out at $40 a barrel. The last time crude oil was that low was 2004, when gasoline was in the $1.50-per-gallon range.

It's unlikely to get that low again because of new blending components, Cohan says. And by early spring, prices will be moving back up again, he says. "They should start to ramp up in March," he predicts.