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Oil Prices Down, Gas Prices Up

What's wrong with this picture?

By Mark Huffman
ConsumerAffairs.com

January 19, 2010

That's right. The world is swimming in oil and its becoming more and more apparent that the world economies aren't going to consume as much petroleum this year as expected. So why on earth are gasoline prices so high?

Though prices have backed off a few cents a gallon since the weekend, motorists are paying on average $2.74 a gallon at the pump. In California, the average price of gas is back over $3 a gallon.

A month ago, average gasoline prices nationwide, as tracked by AAA's Fuel Gauge Report, were 15 cents a gallon lower. In recent days, the Energy Information Administration predicted average prices will break the three dollar mark some time during the spring and summer of 2010, with an annual national average price of $2.84 per gallon for the year as a whole.

“Given that prices have already passed $2.70 per gallon without the traditional spring and summer price run up providing a boost, the EIA projections certainly fit the price trends currently being established for the year,” said Andrew Delmege, AAA's manager of regulatory affairs.

Gasoline prices bottomed in December 2008, after the economy fell off a cliff in October, but began rising again last January. However, gas prices one year ago were an average of $1.84 a gallon, 90 cents lower than today.

Oil prices have declined in recent days based on revised assumptions about the world economy. With oil traders now betting there will be less demand than previously expected, they're selling their positions in oil.

Oil Still Overpriced

Bloomberg quotes oil analyst Andy Sommer of Elektrizitaets-Gesellschaft in Switzerland as saying oil prices are still overpriced by about $2 a barrel. He says OPEC is still producing too much for the current market demand.

Gasoline prices escalated in 2008 with oil prices, which eventually reached $140 a barrel. They went down with oil prices, which bottomed in the mid $30 range.

With oil prices changing rapidly last year, gasoline prices remained remarkably consistent, but near their highs of the year. If oil prices drop significantly in the next few weeks, can motorists expect a similar price reduction at the pump?

Delmege says there are “innumerable factors” that could derail previous estimates of a big run-up in gasoline prices. But oil traders live in a short term universe, and positive economic forecasts could suddenly propel oil prices higher a week, or month from now.

So, while gasoline prices might begin a slow descent, motorists shouldn't count on it.

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