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Motorists Finally See Relief at the Gas Pump

Energy: A mild winter, decreased demand in Asia and increased supplies are helping to reduce crude oil prices.


California motorists are finally getting a break at the gas pumps as a mild winter, diminished energy demand in Asia and expanding global oil supplies are all helping to push down crude oil prices.

According to the Energy Department, the average price of a gallon of unleaded gasoline in California was $1.29 as of Monday, down 14 cents a gallon, or 10%, since mid-September. Gas prices are at their lowest level since July, and prices below $1.20 are becoming increasingly common in Southern California.

And optimism--or pessimism, if you are an oil investor--runs high in some quarters that shifting global oil economics will push crude prices even lower in coming weeks, which should mean more good news for motorists.

"If history repeats itself, the logical conclusion would be yes, pump prices should reflect over time more reduction in [crude oil] price," said Jim Huccaby, pricing manager for Chevron U.S.A.

But local motorists, hardened to the vagaries of a California gasoline market that forces them to pay more for fuel than most Americans while waiting longer to benefit from crude oil price drops, are receiving this New Year's gift with plenty of cynicism.

"You don't get to keep it. Pretty soon the prices will be going back up," said Bruce Wayne Struzan, a retired contractor who was pumping $1.50-a-gallon premium gas into his car at a Chevron station in Los Angeles.

Griped motorist Bob Rigdon of Highland Park: "The prices aren't going down as fast as they went up," referring to last year's gas price run-up. And he added that he's not counting on prices staying low for long: "I don't count on anything."

These skeptics get backing from such experts as oil analyst John Hervey of Donaldson Lufkin & Jenrette, who sees gasoline prices rising again by spring at the latest as the summer driving season draws near.

The recent relief at the pumps is only partly related to the decline in crude oil prices, steep though it is. The price of Alaskan crude, the source of almost half of California's fuel supply, closed Tuesday at $14.91 a barrel, nearly a 25% drop from October's spot price of $20.45.

Futures contracts for the benchmark West Texas intermediate crude stood at $26.23 per barrel a year ago--and closed Wednesday at $16.82, a decline of one-third.

But pump prices are more immediately affected by local gasoline inventories, which are high in California in preparation for scheduled refinery maintenance work, Huccaby said. That means gasoline production will slow and inventories will fall just as seasonal demand starts to pick up--likely leading to higher prices at the pump.

Gas prices are somewhat lower in Southern California than in the state overall. For example, San Francisco-based Chevron Corp. said the average price of unleaded gas at its Southland stations is about $1.28 a gallon, down 21 cents from the mid-October average. A survey of several downtown Los Angeles stations Wednesday morning found most charging between $1.22 and $1.30 per gallon for regular unleaded. Many stations elsewhere were charging $1.19 or less.

But the recent price breaks don't change the fact that Californians pay more for gas than most Americans: Last week the U.S. average was only $1.10 a gallon, 20 cents less than what Californians paid. Industry officials say the main reason is the added cost of 5 cents to 15 cents per gallon of refining California's cleaner-burning fuel, mandated by state law since 1996.

Another factor is California's isolation from the rest of the nation. The state is not connected by crude or gasoline pipeline to the rest of the country. So when refineries here shut down because of fires or maintenance, gasoline refined to California's unique standards is shipped in by boat to offset any shortfalls, adding to costs.

But analysts and oil company executives were in general agreement Wednesday that motorists' season of content has not yet run its course, and that gasoline prices are more likely to fall than rise in coming weeks.

"Gas prices should moderate, stay the same or drift down slightly for the next several weeks," said Tom Glaviano, energy analyst at the California Energy Commission in Sacramento.

For now, consumers are benefiting from a classic global supply-and-demand shift that adds up to lower prices: Growth in worldwide demand for petroleum has suddenly subsided while supplies have suddenly increased.

Why? A mild winter attributed to the effects of El Nino has caused U.S. heating-oil consumption to drop dramatically this winter, which means more crude is available for gasoline, said Scott Ryll, petroleum analyst and trader at Atlanta-based GSC Energy.

Second, the economic crises that have hit several Asian nations have already caused a reduction in crude oil demand in the region, said Rothschild Inc. oil analyst Sal Ilacqua in New York. Although petroleum consumption will grow this year in Asia, the growth will be 300,000 to 500,000 barrels per day less than projected, he said.

The upshot is that oil-producing nations that have developed big markets in Asia have extra crude on their hands and will be offering it to U.S. refiners, Ilacqua predicted.

Meanwhile, after a two-month moratorium, Iraq will soon resume shipping 800,000 barrels a day of crude to world markets, a stream that could double to 1.5 million barrels daily over the next several months, DLJ's Hervey said.

At the same time, members of the Organization of Petroleum Exporting Countries last week raised their daily production quota to 27.5 million barrels, a 10% boost. OPEC supplies about one-third of the world's oil needs. In addition, production at North Sea, Gulf of Mexico and Colombia oil fields is on the increase, Ilacqua said.

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