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Thu October 6, 2011

Under A Barrel: What Happened To Rising Gas Prices?

Originally published on Thu October 6, 2011 8:40 am

When Dave Barnes drove 600 miles from Maryland to Indiana last week for his 50th high school reunion, he was surprised by the price of gas — in a good way.

Barnes, 68, says he filled up his Dodge Challenger in Indianapolis for as little as $3.15 a gallon. It was a far cry from the cross-country motorcycle trip he took this summer.

"When I took the trip in June, I was seeing $3.60 a gallon in most places and as high as $4 a gallon in California," he says.

Six months ago, some analysts were warning that the average price for a gallon of regular gasoline could hit $6 by the end of the summer. Instead, the national average peaked at just under $4 in early May and has headed lower ever since.

One of those analysts, Richard Hastings of Global Hunter Securities, is quick to point out that the $6 talk was only meant as a worst-case possibility.

"It was an outlier scenario," he tells NPR. "That scenario never occurred, and it was never a price target."

And a lot has changed since then.

Three Major Factors

The plummeting U.S. dollar has reversed course, becoming a safe haven for investors getting out of stocks amid worries about a double-dip recession at home and the debt crisis in Europe. Turmoil in Libya, a small but important oil exporter, seems to have subsided. And average Americans, reeling from the poor economy and gas prices that had been climbing skyward, changed their driving habits.

"Prices are coming back down in part because Libyan production is back online, but much more of it is because consumers have finally gotten the message and are learning to consume less," says Philip Verleger, a senior adviser with The Brattle Group, an economic consulting firm based in Washington, D.C.

Although Libya accounts for only about 2 percent of the world oil output, it is a major supplier of much-sought-after light sweet crude, the easiest to convert into low-sulfur gasoline and diesel, Verleger says.

"When we lost that sweet crude supply, diesel and gasoline prices had to go up — dramatically," he says.

Verleger also notes that many Americans are buying cars with better gas mileage and letting gas-guzzling SUVs sit in the garage. "If you have a large sale of inefficient vehicles such as we had in the early part of the first decade of this century — and that was all SUVs — you see a big bulge in consumption," he says. "Now, we're seeing a large shift to more efficient vehicles ... [that] are driven, while the old, inefficient cars are being pushed to the back."

Verleger thinks the dollar's recent rebound has played a role in the decline of fuel prices, but not a decisive one.

That's a view shared by Avery Ash, the regulatory affairs manager at the American Automobile Association. Rather, he points to the uprising in Libya that pried Moammar Gadhafi from power.

"Much of what we saw this spring wasn't necessarily a supply drop, but increased uncertainty as a result of Libya that caused speculators to drive up prices," Ash says. "Once you remove that uncertainty, the opposite occurs."

Gas Prices And The 'Crack Spread'

Even so, the national average for regular gasoline was $3.39 on Thursday, according to AAA's Fuel Gauge Report. That's nearly 20 percent higher than it was a year ago, when the average was $2.75.

Where's the highest price for gas in the continental U.S.? That dubious distinction belonged Santa Barbara, Calif., where gas was going for $3.99 a gallon on Thursday, according to Gasbuddy.com. The lowest price was in Spartanburg, S.C., at $3.02.

Hastings of Global Hunter Securities expects the average price per gallon to fall to $3.25 by late October. "That's still very high. And that's just conventional, so that means premium grade — high octane in some ZIP codes — is still going to be $3.50 to $3.55."

One reason gas prices haven't fallen further is because of something that commodities analysts call the "crack spread," says John Heimlich, chief economist for the Air Transport Association. It's essentially the difference between the cost of crude and what refineries charge their customers for gas, diesel, kerosene and aviation fuel.

The crack spread has remained stubbornly high. For the airline industry, that means jet fuel prices haven't dropped significantly. Fuel is the No. 1 cost to airlines, bigger than labor or maintenance. It represents about one-third of their total costs.

"It's like the show The Biggest Loser. Mary lost 10 pounds, yeah, well she's still 400," Heimlich says.

So while people might be paying less at the pump these days because of a drop in crude prices, they won't necessarily be seeing a drop in air fares.

"Just like you don't put crude oil in your car, I don't put crude oil in my airplane," Heimlich says. "At the end of the day, all I care about is what I'm paying for jet fuel."

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