How much more will gas prices fall?

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

It's hard not to notice the recent drop in gasoline prices. Which has a lot of readers wondering: How much lower are they headed?

If the cost of crude oil has gone down almost 18 percent in the last couple of weeks, how come gas prices haven't dropped as fast?
— Bruce W., Address withheld

If refiners are still running at — or near — capacity, and supplies of gasoline are tight, prices won’t come down. Each market for a specific product — gasoline, heating oil, diesel, crude oil — moves to some degree to the supply-demand balance for that commodity.

So the cost of crude has a lot to do with the rise in gas prices — but it’s not the whole story. As ethanol has become more widely used as an additive to help reduce smog, for example, the price of ethanol has become another factor. But the biggest factor is demand at the pump.

Until recently, refining capacity was expanding barely fast enough to keep up with demand. (Even though no new refineries have been built in the 30 years, refiners have been steadily squeezing more production out of their existing plants to keep up.) And consumers were willing to keep paying for gas as prices rose: Americans are spending roughly three times as much on gas as they were six years ago — or about $1.5 billion a day, according to Tom Kloza at the Oil Price Information Service.

The good news is that it looks like those high pump prices have begun to ease demand — as people figure out how to use less gas — and so prices have fallen. Since July 10, wholesale gas prices have fallen by about 55 cents a gallon on the East Coast, 40 to 45 cents in the Midwest and by 40 cents on the West Coast, according to OPIS.

Kloza figures that as the savings from the lower cost of crude flow through the system, we can expect another 10 to 20 cents a gallon of what he calls “catch-up” price weakness at the pump. The price drop for diesel has been even bigger, according to OPIS; wholesale prices for those products are down by 80 to 90 cents in less than a month.

The bad news: If prices keep falling, and we all go back to using more gasoline again, that will put more pressure on supplies and send prices higher again.

So our hope — one shared by a growing number of readers — would be that we get serious about finding another way to power our cars. Our personal favorite is all-electric vehicles, plugged in and recharged at night when power demand is low. Several car makers say they’ll have all-electrics available by 2010.

The trick will be coming up with a battery pack that can keep going far enough for a long range trip. Some battery makers are working on making these take a 75 percent recharge in about the time it takes to top off a tank of gas.

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