Why Gas Prices Are Falling in Time for Labor Day Travel

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Gas Prices Falling in Time for Labor Day ExcursionsJust when many families have opted for "staycations" instead of traveling for the Labor Day weekend because of the lousy economy, they're finally catching a break on gasoline prices. Fuel is at its second-lowest level in five years, and some economists predict that it could drop much further in the months ahead.

The U.S. Energy Department said Wednesday that the average price of gas in the country was $2.68 a gallon, the least of this summer driving season. Only last year's $2.59 a gallon was lower in the last five years, the department said.

The main reason for the price drop has been the huge run-up in domestic petroleum inventories. U.S. crude oil supplies are at the highest level for August in nearly 20 years, and total petroleum stocks, including gas and other products, are at their highest level since January 1983, the department reports.

Because of the abundance of oil on the global market, it has been trading in a relatively narrow range for the past several months. Light-sweet crude futures (/CL\V10) closed at $71.92 a barrel on the New York Mercantile Exchange on Tuesday before jumping during Wednesday's stock market rally to nearly $74.

"Market Fundamentals Are Pretty Awful"

Michael Lynch, president of Winchester, Mass.-based Strategic Energy & Economic Research, says crude prices are likely to come down to $60 a barrel by year-end. The only thing boosting prices, Lynch says, is that central banks around the world have been putting a lot of money into the financial system, and some of that has flowed into commodities like oil, supporting the market.



Another factor keeping prices from dropping further is the hurricane season, which peaks on Sept. 10. Serious storms could disrupt production in the Gulf of Mexico and supplies on the East Coast, driving up prices temporarily. "After that, you start seeing the fact that market fundamentals are pretty awful," Lynch says.

He's even forecasting a greater decline in prices over the next one or two years. That's because at $70 a barrel, the price of crude is three times its historical norm. Lynch says petroleum is likely to drift down to around $40 a barrel as the market sees a reversion to this norm.

Lynch maintains there's only an indirect connection between oil prices and the GDP growth rate in the U.S, which has fallen in recent months after rising earlier in the year. Lynch notes that the U.S. just experienced a recession during which oil prices remained relatively high.

Speculators Have Limited Influence

Some market experts believe that financial speculators have also kept crude prices higher than they would be naturally if only market supply and demand conditions were setting them. Over the last 10 years, investors have piled into exchange-traded funds like the United States Oil Fund (USO), which invests in oil futures as a proxy for price swings in West Texas Intermediate crude.

Lynch disagrees. "It's an influence, but it's not a huge influence, because if people thought the price was being held up by speculators, they would short the market and bring the price down," he says.

The International Energy Agency on Wednesday released 30 years of energy statistics that dramatically show the changing pattern of world energy production and consumption.

China, for example, accounted for just 7.9% of total world consumption in 1973, but in 2008 it hit 16.8%. The rest of Asia also nearly doubled its fuel use, while the industrial countries in the Organization for Economic Cooperation and Development saw their share of world consumption decline from 60.1% to 43.8%.

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DocLagos

Where did they fall, in HELL??

September 06 2010 at 11:39 AM Report abuse +1 rate up rate down Reply
Paul

Gas prices dropped???? Here in north central West Virginia (Clarksburg-Fairmont-Morgantown) the price went UP 20-cents or more. Gov Manchin must have slapped another gas tax on us.

September 05 2010 at 12:53 PM Report abuse rate up rate down Reply
grouchyklingon

Gas prices in my part of Ontario have remained approx. where they were before the Labour Day weekend. No big price spike. But they are still too high to be justified by any reason other than GREED.$1.00 a litre/4.54 a imperial gallon. Lets see them actually post the real production and transport cost, not the profit driven inflationary prices. I do not mind paying a FAIR and reasonable price for anything, just hate to be ripped off, like most people. I agree with the idea of removing oil from the stock markets. No need to speculate on necessary energy. Charge a modest, small markup to cover costs, not make the oil companies richer than some small countries. Who knows , it may do more to stimulate the economy than just throwing money at the big corparations that engineered the crash in the first place.

September 05 2010 at 8:35 AM Report abuse rate up rate down Reply
1 reply to grouchyklingon's comment
justin

Thats because no one wants to come to Ontario (no offense just the truth) and you are correct it is all about GREED.

September 05 2010 at 12:18 PM Report abuse rate up rate down Reply
dx75

And how much money did BP give the Messiah? Millions. 88 percent of ABC CBS NBC employee political contributions went to Obammo. Think WE will get a straight answer from THEM?

September 04 2010 at 10:19 PM Report abuse +1 rate up rate down Reply
1 reply to dx75's comment
DocLagos

Hey STUPID, Get a Life!!

September 06 2010 at 11:40 AM Report abuse -1 rate up rate down Reply
blueshk

I parked one of our cars two years ago....now it runs maybe 300 miles a year...and no credit card use for any oil company! Let them cry about that.

September 04 2010 at 1:58 PM Report abuse +1 rate up rate down Reply
camarillofats

Let's see now; if gas prices are down it should cost less to fill my tank, right? How come it doesn't? I think there's a republican in the woodpile somewhere.

September 04 2010 at 1:54 PM Report abuse -2 rate up rate down Reply
Hans

they are? Could have fooled me!

September 03 2010 at 10:16 PM Report abuse +2 rate up rate down Reply
RICK

DON,T KNOW WHERE THE HELL YOU ARE BUT GAS HAS RISE .24 CENT A GAL TWO DAYS AGO I DON,T CALL THIS LOWING PRICES

September 03 2010 at 10:13 PM Report abuse +2 rate up rate down Reply
trshaf6

They hope to sell more gas, and travel helps boost the economy.Hardly anyone can still afford it because they are out of work,or cut down hours at work and afraid to spend.

September 03 2010 at 5:29 PM Report abuse +1 rate up rate down Reply
goldaxe

Speculators have more to do with prices than they would have us believe.The reason it goes up is thats the path of least resistance,or they would short it.Remember it was $80 a brl when regan was president,but when clinton was in it dropped to $11 a brl. So.........Try another excuse.Oil should be a lot less.

September 03 2010 at 2:10 AM Report abuse -1 rate up rate down Reply