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Originally published May 15, 2008 at 12:00 AM | Page modified May 18, 2008 at 5:59 PM

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Don't hope for gas prices to drop, says oil economist

Most drivers think $4 per gallon of gasoline is too much to pay in a weakening economy. Sales for sport-utility vehicles are plummeting...

Seattle Times business reporter

Most drivers think $4 per gallon of gasoline is too much to pay in a weakening economy. Sales for sport-utility vehicles are plummeting. And people are actually driving less.

But don't expect prices to fall anytime soon despite slackening domestic demand, American Petroleum Institute chief economist John Felmy said Wednesday. The API, based in Washington, D.C., represents the U.S. oil and gas industry.

Gasoline prices are driven by the high cost of crude oil, which surpassed $125 a barrel on Wednesday. That's in large part because the slowdown in U.S. oil demand is being offset by growing consumption in China, India and the Middle East, said Felmy, who came here for a speech to the Seattle Economics Council.

"You have 2 billion people who want cars," he said.

The thirst for oil is growing faster than the world's capacity to produce it — at least 600,000 barrels a day faster, according to Energy Information Administration data.

In the short term, supply disruptions and the imminent arrival of summer could lift prices further. Not only are millions of Americans expected to hit the road, but hurricanes will threaten rigs and refineries in the Gulf of Mexico.

"It's a cloudy crystal ball," Felmy said.

Goldman Sachs analyst Arjun Murti made headlines and encountered skeptics in 2005 when he predicted that oil prices would hit $100 a barrel. Last week, Murti declared that crude is likely to hit $150 to $200 over the next six to 24 months.

The "super-spike" is the market's way of rationing a scarce commodity, and will lead to a "sharp correction" in oil demand, especially in the U.S., which accounts for a quarter of global oil consumption, Murti wrote in a report.

Only such a drop in how much the U.S. consumes is likely to restore the balance between supply and demand that kept oil cheap in the 1990s. "U.S. demand will likely have to stay weak if global oil markets are to stay in balance," Murti said in the report.

A sharp fall in demand helped bring prices down after the oil boom of the late 1970s, said Felmy, but it's unlikely that that will happen soon.

Proportionately, U.S. consumers aren't spending as much on gas as they were in the last oil crunch. In 1981, 6.9 percent of their income went to gasoline; now it's about 5 percent, he said.

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Felmy said that U.S. refiners are being squeezed as much as consumers, because the price of their raw material — crude oil — is soaring, while demand for their product is dropping rapidly.

Of course, half of the refiners are also profitable oil producers — big companies like Shell, Chevron, and Exxon Mobil — and they have been able to profit from the run-up in crude prices.

Recently proposed windfall-profit taxes on Big Oil won't help bring energy prices down, said Goldman's Murti, who considers the oil industry's profits, while above historical average, are "hardly excessive."

"Higher taxes do not stimulate additional investment to grow supply," Murti said in the report.

Ángel González: 206-515-5644

The information in this article, originally published May 15, 2008, was corrected May 18, 2008. The American Petroleum Institute's chief economist is John Felmy. A previous version of the story included a photo caption that misspelled Felmy's name.

Copyright © 2008 The Seattle Times Company

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