Slowing economy helps keep down gas prices

Some consumers may be using less gas because they can’t afford it. But even as prices have surged, motor fuel still consumes a relatively small portion of most household budgets. Still, slumping SUV sales — while bad for car makers’ bottom lines — are gradually increasing the overall mileage of the fleet of vehicles on the road. And that’s beginning to have an impact, says Sundstrom of AAA.

Lower gasoline prices have taken a bite out of record high profit margins for refiners, who are still paying $90 a barrel for crude, roughly 60 percent more than they were paying a year ago. Profit margins collapsed by some 70 percent in the second half of last year.

The drop in energy prices — due in part to the weakening economy — could help blunt the downturn, especially if pump prices remain tame and consumers feel more like spending. But the impact may be limited. As the global economy boomed earlier in the decade, and oil prices went from $25 to $100 a barrel, the impact of the surge was muted by the fact that the economy uses about half as much oil per dollar of gross domestic product as it did in the 1970s. Now, with demand slackening, the impact on the downside may be muted as well.

“Oil prices dropping are going to be a help and probably a bigger help than the stimulus,” Harvard University economist Kenneth Rogoff told reporters at the CERA conference. “But it’s not going to untangle the subprime mortgage mess.”

Unless the economic downturn gets substantially worse, seasonal demand for gasoline is expected to pick up again this summer. But forecasters have been scaling back estimates of just how high prices will go.

Gasoline is now expected to peak at a record $3.40 a gallon in the spring, according to the latest forecast from the Energy Information Agency. That is less than the $3.50 spike the EIA predicted in last month’s report.

Crude oil, pegged by the EIA last month at an average price of $87 a barrel this year, is now expected to average $86.46 a barrel. Prices are expected to fall next year.

Few here expect the softening in energy prices to last once the economy gets back on its feet. Oil executives spent much of the conference discussing how and where they hoped to find enough new crude production to both replace the decline in output from aging fields and meet the expected increase in demand over the coming decades.

Despite major advances in technology, the industry faces a series of problems keeping markets supplied — from an aging workforce to geopolitical turmoil in oil rich regions. Beyond looking for ways to boost oil supplies, this year’s conference found greater consensus on the need to reduce demand by boosting auto mileage and speeding research into fossil fuel alternatives like fuel cells.

So while the current economic downturn may offer the industry a bit of breathing room, any softening of demand is only temporary, said Hess.

“An oil crisis is coming in the next 10 years,” he told his industry colleagues. "That means we have to act now.”

Don't miss this on MSNBC.com Pass it on: Sons of infertile men may be next The eight biggest Olympic marketing debacles Reality show judges range from wise to wacko Cosmic Log: Is this your jetpack? Forget your inhibitions: World's sexiest islands

MORE FROM OIL & ENERGY

Oil & Energy Section Front

Oil dips to lowest level since October Newsweek: New market bubble is brewing Cost of gas nudges up 2 cents in last two weeks Chevron 3Q profit slumps 51 percent BusinessWeek: The coming energy revolution Solar power outshining Colorado’s gas industry Citigroup dumps Phibro, avoids showdown Emirates: Oil pricing will remain in dollars Lower winter heating costs expected In shift, oil traders yawn at fresh Iran tension Oil & Energy Section Front   Add Oil & Energy headlines to your news reader: