Gas prices not falling as fast as oil's drop

WASHINGTON — Oil prices have fallen more than 26 percent from their July 11 record high of $147.27 a barrel, and all evidence points to further declines.

The price Americans pay at the gas pump has fallen a more modest 12 percent at Thursday's national average of $3.67 a gallon. That's led some consumers to wonder if they're being gouged.

In the Seattle-Bellevue-Everett area, the average price Thursday for regular was $3.865, compared with $2.845 a year ago.

Here are some reasons why the price of gasoline, while dropping, isn't moving in lock-step with falling oil prices.

Q. Why aren't gasoline prices mirroring oil's slide?

A. "Because they didn't go up high enough in the first place," explains Phil Flynn, an expert in oil contracts for Alaron Trading in Chicago. "The truth of the matter is when crude oil went up to $147 a barrel, the refiners weren't able to pass on the entire cost of crude at the pump."

In mid-March, oil prices were just under $100 a barrel and gas was an average $3.27 a gallon. When oil hit $147, it was a 47 percent jump. Gas prices peaked 84 cents higher, a rise of about 25 percent.

Q. In other words, refiners weren't able to pass along all their rising costs to consumers and now they're trying to take profits on the downside?

A. That seems to be the case. The soaring oil prices clearly were not responding to simple supply and demand. Prices shot up in part because of factors like a weakening dollar, inflation and fears of a U.S. financial meltdown.

Investing in oil contracts became a safety hedge, kind of like investing in gold on fears the dollar would weaken further. (Gold prices, too, have since dived.)

Even as evidence mounted that demand for oil and gasoline was falling, oil prices moved up despite the contrary demand signals.

Q. So gas prices should have been higher than the record $4.11 a gallon nationwide average on July 17?

A. "Had the cost of gasoline kept up with the cost of crude ... gasoline prices at the peak should have been 20 percent to 25 percent higher," said Flynn, adding that refiners had to eat a lot of the rising costs and "are trying to make back some of the money as prices go back down."

Q. That's the view of an oil trader. Who else shares it?

A. The AAA Motor Club believes gasoline prices did not match the run-up price and thus won't likely parallel the drop in oil prices.

"We're in general agreement. Definitely when oil got to $147 a barrel back in July, that cost was not fully passed along to the consumer because, as many Americans know, we were making fewer visits to the gasoline station for most of this spring and summer," said Geoff Sundstrom, a national spokesman for AAA. "And so to a certain degree the profit margins at your local gasoline station were slim to none. ... I don't think it has anything to do with manipulation."

Q. What's going to happen to gasoline prices going forward?

A. On just supply-demand variables, everything points to further drops.

Thursday's gasoline inventory report from the Energy Information Administration (EIA) showed that last week's gasoline supply fell by 1 million barrels, not the 1.8 million expected.

That pushed prices for next-month oil delivery down to $107.92 on the New York Mercantile Exchange.

Americans are simply driving less and switching to more fuel-efficient vehicles. Gasoline consumption fell 1.6 percent over the peak summer season in July and August, the EIA said, and that's the first time that's happened in 16 years.

And a weakening global economy means even less demand for oil and gasoline.

"We believe that as long as the oil price stays near current levels ... the nationwide average price would hit $3.50 a gallon sometime this month," said Sundstrom.

"We're talking about an additional decline of 15 cents to 17 cents per gallon."

If oil prices fall below $100 a barrel after the hurricane season — predicted by some analysts — Americans could be looking at $3 a gallon gasoline later this year.

A lot of factors would have to come together, however. And the oil export cartel OPEC meets Wednesday, with some members like Iran vowing to slash production to prevent prices from falling under $100 a barrel.

Stay tuned.