Gas prices could drop 20 cents by Memorial Day, experts say

Gas prices are expected to drop – perhaps quite a bit – as the wholesale price of gasoline tumbles. The size of the drop will depend on how long commodities prices remain low.

Drivers may finally get a break at the pump.

Perhaps even by this weekend, the price of regular grade gasoline could be as much as 10 cents a gallon lower and by Memorial Day another 20 cents a gallon lower.

Behind the falling gas prices: a collapse of the price of gasoline on the futures market.

On Wednesday, the wholesale price of gasoline on the New York Mercantile Exchange drooped almost 26 cents a gallon. On Thursday, the price fell a further 7 cents to $3.05.

“The bubble has been pricked,” says John Kilduff, president of Again Capital, an energy trading firm in New York. “Behind the fall was an uptick in supplies.”

On Wednesday, the Department of Energy reported a buildup in both gasoline and crude oil stockpiles. At the same time, the report showed a surge in imports from Europe where demand and prices are lower.

“We’re importing a million barrels of gasoline per day,” says Sandar Cohan, a principal at ESAI, an energy consulting firm in Wakefield, Mass. “It makes sense to put gasoline in a tanker and ship it to the US.”

Earlier in the week, some traders were worried that the flood now moving down the Mississippi River would adversely affect the refineries north of New Orleans along the river. But refiners have not reported any difficulties yet.

“There is a realization this is not hurricane Katrina,” he says.

Even though the price of gasoline was falling on the commodities markets, the price at the pump has not yet started down. According to AAA, the price of regular gasoline is now $3.98 a gallon, up from $3.96 a gallon on Wednesday.

“There is a lag,” says Mr. Cohan. “It takes a while for the wholesale price to trickle down.”

Meanwhile, on Capitol Hill, Senate Democrats held hearings Thursday on ways to reform the tax code – saying they would like to eliminate oil companies' ability to write off about $2 billion. But oil companies have said that would result in increased gas prices. Democrats were incredulous.

"I find it hard to understand how you can come here before this committee and the American people and say, when you are projected to make $125 billion in profits this year that somehow the loss of $2 billion a year, which means you only make $123 billion in profits, is somehow so punishing, somehow not part of shared sacrifice, somehow you need to go back at them at the pump to make up for it." said Sen. Robert Menendez (D) of New Jersey.

The oil companies received some support from other business groups. “The notion of raising taxes on energy companies will not lower gas prices,” said Jay Timmons, CEO of the National Association of Manufacturers, in a statement.

However, the group Public Citizen, which has criticized the oil industry in the past, says its research finds that “Big Oil” spends more money on stock buybacks, dividend payments, lobbying, and marketing than on US oil investments.

"Our research shows that since 2005, the largest five oil companies operating in the US spent nearly half a trillion dollars buying back their own stock and paying dividends to shareholders,” said the group in a statement. “This contradicts the industry’s insistence that its billions of dollars a year in tax breaks are needed to create jobs and keep gas prices affordable.”

Although energy prices are now starting to come down, the bad news for producers and consumers “is that prices are generally stickier on the downside, meaning it would take a sustained period of lower commodities prices for the price pressure to alleviate,” writes Gregory Daco, senior US economist at IHS Global Insight in Lexington, Mass., in a research note.

However, that may just happen. Cohan expects gasoline prices to be at least 40 cents a gallon lower by mid-July.

“I think gasoline prices will stay high, but there will be some relief,” he says.