Price of oil plunging, but cost of gas won’t

The average gasoline retailers have to charge 13 cents per gallon more than they paid to break even, Eichenberg said, and mark it up even more to make a profit.

The Oil Price Information Service shows that in 2006, the average gross margin for retailers was 13.76 cents a gallon — meaning profit was less than a cent per gallon. Because of credit card transaction fees, the credit card industry profited more from gasoline sales last year than gas stations did, Eichberger said.

So station owners are loath to bring prices down too far too fast, especially if they’re recovering from profits that were squeezed last year. Price wars hit in November and December, Oneslager said, even though wholesale prices were fairly steady and crude oil was down from its summer highs.

Crude oil prices are about $10 lower than where they were a month ago, and many market analysts are saying they could tumble even lower. The reasons include the Northeast United States’ warm winter, which caused a glut in heating fuels, and traders following a wave of big funds in making bets in the market that prices will fall. Also, demand may not be as high as some had thought: the American Petroleum Institute said Friday that in 2006, U.S. demand for petroleum fell to below 2004 levels.

At this point, aside from retailers who are trying to make up big losses from last year, there’s no reason gasoline prices need to stay high, Sundstrom said.

“Retailers need to see the development of a trend to lower prices. They need to be convinced that these prices will stay down. Now that we’re going into third week of prices below $60, AAA’s position is that a trend has been established,” Sundstrom said.

He guessed that pump prices will fall further, nearing $2 a gallon in the coming weeks, as gasoline retailers ramp up the competition.

Kevin Lindemer, head of Global Insight’s energy group, said that historically, gasoline prices tend to drop 2-2.5 cents for every $1 that crude oil drops in the energy markets. With crude oil prices down $10 now from its December levels, U.S. drivers are likely to see pump prices fall about 10 cents further.

That’s an average of all U.S. gasoline prices; many regions are already seeing pump prices well under $2 a gallon, while others are still around $3.

Only three states, as of Friday, saw an average price under $2: Michigan, Missouri and Oklahoma. What makes these states special is lower taxes, Sundstrom said, as well as proximity to pipelines and barge routes, which make distribution costs lower. The states that generally see the highest gas prices are California, Hawaii, Oregon and Washington.

Overall, drivers should see a bit more savings when filling their tanks, perhaps enough to upgrade their coffee to a latte occasionally. But they shouldn’t get too comfortable, because the spring and summer driving seasons could push prices back up. Not only does demand rev up as more people go on road trips, but the type of gasoline is more expensive to refine — summer gasoline has to meet environmental regulations that winter gasoline does not.

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