Slowing economy helps keep down gas prices

John W. Schoen Senior producer • Profile • E-mail

HOUSTON - With the U.S. economy slowing sharply, American consumers are pulling back. The Bush administration and Congress are handing out tax rebates worth hundreds of dollars per person to help blunt the slump. But consumers are also catching a break from another, unlikely source — the gas pump.

Last year's surge in energy prices came as a booming global economy helped fuel demand, especially as rapidly developing countries like China paid whatever it took to keep their growth machines humming. Now as that growth is slowing, especially in the U.S., energy consumers are taking their foot off the gas. One result is a drop in demand and a buildup of inventories — factors that have sent prices falling.

The slowdown in gasoline demand was one of many topics discussed at a gathering here of oil executives, investors and the media hosted by Cambridge Energy Research Associates.

John Hess, CEO of independent oil producer and refiner Hess Corp., told reporters his company began to see demand for gasoline ease — and in some cases decline — beginning in the fourth quarter of last year.

“I think that speaks to the serious economic downturn the U.S. economy is going through,” he said.

Forecasters are divided on just how rapidly the economy is slowing, or how long the downturn will persist. Oil executives here noted that any drop in demand will be temporary as the world’s thirst for oil continues to grow. In the short term, though, Energy Department data confirms that as demand has softened, inventories have been building. That has produced a drop in prices of 12 cents a gallon since the first of the year, to just below $3 on average nationwide.

On top of the seasonal decline in driving, businesses are also cutting back on gasoline consumption as the economy slows, analysts said.

“We tend to think of commuting or vacation,” said Geoff Sundstrom, a spokesman for the American Automobile Association. “But when you think about the various tradesmen out on the road, the salespeople, the short-haul deliveries that get made, as the economy weakens, particularly in the construction sector, there’s just less gasoline consumed."

Refiners, meanwhile, have seen inventories build. Some have cut back production during the slack winter months to complete annual maintenance and finish repairs on a series of outages that crimped supplies last year. Those unplanned outages came after several years of overhaul to meet new low-sulfur refining standards and the phaseout of a clean fuel additive, MTBE. With those modifications behind it, the refining industry is in better shape that it has been in a while, according to Tom Kloza, publisher at the Oil Price Information Service.

“It’s tough for me to come up with a scenario that matches the supply problems last year,” he said.

Pump prices also have been coming down as dealers rely more heavily on ethanol, which is finding its way to more parts of the country in larger quantities. (Because the corn-based biofuel can’t be shipped by pipeline, transportation bottlenecks have slowed the flow of ethanol outside the Farm Belt.) Heavy government subsidies have helped spur a surge in production, keeping ethanol prices below the cost of gasoline. So every gallon of gasoline that is cut with ethanol is cheaper to produce.

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