Gas prices skid 25 cents a gallon in past month – and may dip further

Gas prices have fallen to $3.72 since topping out at $3.98 a gallon in May. Plenty of supply and soft demand mean gas prices are likely to keep falling this summer – perhaps another 30 cents a gallon.

The price of gasoline is down about 25 cents a gallon over the past month, to $3.72 – and energy analysts say it is likely to drop perhaps another 30 cents a gallon over the summer.

Driving the decline: plenty of supply and soft demand.

“There is still a lot of air to come out of the gasoline market,” says Sander Cohan, a gasoline market analyst and principal at Energy Security Analysis Inc. in Wakefield, Mass. “The stage is set for it come down more.”

Woohoo! Time to hop in the convertible and go for a ride!

Well, there probably isn't reason to get too excited. The sudden drop in prices takes Americans back to early April's cost for a fill-up, and prices probably won't get down to last year's level of $2.70 a gallon.

Still, falling gasoline prices are likely to help both consumers and the economy overall. Recent reports indicate the US economy is growing at a slow pace, and economists suggest that some of the weakness can be attributed to high gasoline prices, which hit almost $4 a gallon nationally in May. Lower fuel prices could translate into more household spending on things such as ice cream, clothing, and groceries.

“It should flow through to all areas of consumer spending,” says economist Richard DeKaser of the Parthenon Group, a consulting firm, in Boston. “It will be especially helpful to people who have a budget.”

If the price of gasoline were to settle at $3.50 a gallon, consumers would spend about $75 billion more this year on gas than they did last year, estimates Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pa.

“To put that into context, American consumers are getting a tax cut of $120 billion from the payroll tax holiday,” says Mr. Zandi. “So they will still be ahead if it settles into $3.50 a gallon pretty soon.”

Even more important, Zandi says, a price of $3.50 a gallon would give the economy a boost as the year progress and into 2012.

However, if the price remains at its current level, the economy would remain shaky though the end of the year, he says. If gas prices were to climb back to $4 a gallon or higher, the threat of a second recession – sometimes called a double dip – would become significant, he adds.

Many energy analysts don’t expect that to happen. The forecast from the Energy Information Administration (EIA), part of the US Department of Energy, is for gasoline prices to decline to $3.70 a gallon in June and to $3.66 a gallon by September. On the futures market, the price for gasoline for September delivery translates into about $3.69 a gallon.

Mr. Cohan says prices could fall to between $3 and $3.40 a gallon by summer's end. Phil Flynn, an energy analyst at PFG Best, a commodities brokerage house, says he would not be surprised to see prices fall 25 cents a gallon from their current level.

Behind the falling prices are more supply and less demand. In the spring, many refineries unexpectedly shut down for repairs. Then, the Mississippi River flooding prompted some refiners to close as a safety precaution. Most of the refineries are back up.

At the same time, May's high US gasoline prices attracted imports, with as much as 1 million barrels of gasoline per day pouring into the East Coast from abroad, says Cohan.

Demand, meanwhile, has been lower than it was last year, says Tancred Lidderdale, an EIA energy analyst in Washington. “Our forecast is for a slight decline in gasoline consumption for 2011 compared to last year,” he says. Since 1982, there have been only three years when demand for gasoline fell. “They were all recession years,” says Mr. Lidderdale.

Of course, the price of gasoline partly depends on the price of oil, which remains about $100 a barrel.

One reason the price of oil remains relatively strong, says Lidderdale, is stronger demand from Asia. EIA has raised its forecast for Chinese consumption of oil because of an increased demand for electricity. “Chinese electricity demand is going to outpace their traditional supply of coal,” says the EIA analyst. “We are going to see an increased use of portable generators driven by distillate fuel" (the cheapest oil available), he says.

The EIA expects Chinese imports of oil to grow this year by 700,000 barrels per day and another 550,000 per day next year.

It’s not clear where China will get the extra oil. This week, Saudi Arabia and Iran differed over whether to increase supplies of crude oil. The Saudis wanted to raise production, while Iran did not. The EIA expects Saudi Arabia to win out, increasing its oil production as world demand rises going into summer.