Oil Prices Drop. Will Gas Prices Follow?

It may provide no comfort to motorists paying over $4 a gallon for gasoline to know that supplies of crude oil and gasoline are plentiful.

The fact is, U.S. stockpiles of motor fuel remain near all-time highs, as consumers have cut their demand in the face of rising prices.

There’s plenty of oil as well. Abdalla Salem El Dadri, the secretary general of OPEC, said over the weekend the market is well-supplied with oil and there is no reason to pump any more at the moment. That follows last week’s observation by a Goldman Sachs energy analysts that higher prices are being driven by speculation, not market fundamentals.

A weeks worth of bearish sentiment on oil prices may be beginning to have an effect. Crude oil futures prices fell in early trading today, as the same speculators who bid up the price may be looking to get out of their positions before prices fall. Analysts think it’s finally getting through to the oil market that there’s plenty of oil, and the law of supply and demand has not been repealed.

Relief at the pump?

That, of course, could be good news for motorists, if the drop in oil prices translates into lower prices at the pump. Normally it would, if the drop is sustained. A retreat to below $100 a barrel could lower prices as much as 20 to 30 cents a gallon.

That happened in early October 2008, when oil prices plunged in the wake of the credit crisis. The average price of a gallon of unleaded regular, as measured by the AAA Fuel Gauge survey, fell more than 30 cents a gallon in seven days.

Today, the average U.S. price of self-serve regular today is $3.833 a gallon, 29 cents higher than a month ago and 98 cents higher than at this time last year, according to AAA. But gasoline is much higher in some areas of the country.

The average price of gas is over $4 a gallon today in five states and the District of Columbia. In California, where the average price is $4.20 a gallon, with the highest average in the state in San Francisco, at $4.26 a gallon.