From the Seattle Times: http://seattletimes.nwsource.com/html/busi...onsumers14.html

Article is below in case link doesn't work.


Analyst predicts plunge in gas prices
By Kevin G. Hall

McClatchy Newspapers

WASHINGTON — The recent sharp drop in the global price of crude oil could mark the start of a massive sell-off that returns gasoline prices to lows not seen since the late 1990s — perhaps as low as $1.15 a gallon.

"All the hurricane flags are flying" in oil markets, said Philip Verleger, a noted energy consultant who was a lone voice several years ago in warning that oil prices would soar. Now, he says, they appear to be poised for a dramatic plunge.

Crude-oil prices have fallen about $14, or roughly 17 percent, from their July 14 peak of $78.40. After falling seven straight days, they rose slightly Wednesday in trading on the New York Mercantile Exchange, to $63.97, partly in reaction to a government report showing fuel inventories a bit lower than expected. But the overall price drop is expected to continue, and prices could fall much more in the weeks and months ahead.

Here's why:

For most of the past two years, oil prices have risen because the world's oil producers have struggled to keep pace with growing demand, particularly from China and India. Spare oil-production capacity grew so tight that market players feared that any disruption to oil production could create shortages.

Fear of disruption focused on fighting in Nigeria, escalating tensions over Iran's nuclear program, violence between Israel and Lebanon that might spread to oil-producing neighbors, and the prospect that hurricanes might topple oil facilities in the Gulf of Mexico.

Oil traders bet that such worrisome developments would drive up the future price of oil. Oil is traded in contracts for future delivery, and companies that take physical delivery of oil are just a small part of total trading. Large pension and commodities funds are the big traders and they're seeking profits. They've sunk $105 billion or more into oil futures in recent years, according to Verleger. Their bets that oil prices would rise in the future bid up the price of oil.

That, in turn, led users of oil to create stockpiles as cushions against supply disruptions and even higher future prices. Now inventories of oil are approaching 1990 levels.

But many of the conditions that drove investors to bid up oil prices are ebbing. Tensions over Israel, Lebanon and Nigeria are easing. The hurricane season has presented no threat so far to the Gulf of Mexico. The U.S. peak summer driving season is over, so gasoline demand is falling.

With fear of supply disruptions ebbing, oil prices began sliding. With oil inventories high, refiners that turn oil into gasoline are expected to cut production. As refiners cut production, oil companies increasingly risk getting stuck with excess oil supplies. There's already anecdotal evidence of oil companies chartering tankers to store excess oil.

All this is turning financial markets increasingly bearish on oil.

"If we continue to build inventories, and if we have a warm winter like we had last winter, you could see a large fall in the price of oil," said Gary Pokoik, who manages Hedge Ventures Energy in Los Angeles, an energy hedge fund. "I think there is still a lot of risk in the market."

As it stands now, the recent oil-price slump has brought the national average for a gallon of unleaded gasoline down to $2.59, according to the AAA motor club. In the Seattle area, prices per gallon have fallen to $2.856 currently from $3.071 a month ago, a decline of 7 percent, according to AAA.

Should oil traders fear that this downward price spiral will get worse and run for the exits by selling off their futures contracts, Verleger said, it's not unthinkable that oil prices could return to $15 or less a barrel, at least temporarily. That could mean gasoline prices as low as $1.15 per gallon.

Other experts won't guess at a floor price, but they agree that a race to the bottom could break out.

"The market may test levels here that are too low to be sustained," said Clay Seigle, an analyst at Cambridge Energy Research Associates, a consultancy in Boston.

On Monday, the oil-producing cartel OPEC hinted that if prices fall precipitously, OPEC members would cut production to lift them. But that would take time.

"That takes six to nine months. If we don't have a really cold winter here [creating a demand for oil], prices will fall. Literally, you don't know where the floor is," Verleger said. "In a market like this, if things start falling ... prices could take you back to the 1999 levels. It has nothing to do with production."

Copyright © 2006 The Seattle Times Company

Gas prices have come down as much as 20% in the last 2 months around here. Makes me feel a lot better about towing out to Nationals next week. I had estimated I was going to use $600 of gas round trip, now it looks closer to $450. That's significant to me.

My wife and I have been car pooling to work more and more as the price went over $3/gal. Even if the price goes sub $2/gal, I think we will still carpool. The high prices have tought us good habits. I have noticed the number of parents driving their kids to school has declined with the high prices, which has made a positive impact on traffic in the area. I sure hope the kiddies keep riding the bus. (IMG:http://www.frrax.com/rrforum/style_emoticons/default/whip.gif)

I have totally cut back also! I know what you mean about bad habits Phil! No need to revert back. Well, maybe for a short time once I have my '91 Formula stroker project up and running! (IMG:http://www.frrax.com/rrforum/style_emoticons/default/wink.gif)

This week I filled up the diesel and the next day diesel was 16 cents cheaper a gallon! All gas prices and diesel (now 2.99gal) dropped below $3 at my gas station, which is one of the cheapest in this area of Northern CA.

Nah, SoccerMom will be back to herding the little darlings to school once it costs less than $50 to fill her 'Burb. :-)

I read that the Weather Service is indicating that El Nino conditions are developing in the Pacific. That means mild winters for NA. Maybe heating oil, and therefore diesel, will also come down to sane levels this winter. Of course, I live in the Oil Capital of the US, so too much of a drop in the price of a barrel starts costing jobs here. Like most big companies these days, Big Oil doesn't hesitate an eye-blink to whack a few heads so the CEO can make his Christmas bonus.

I'm betting not long after early November prices go back up. Call me a conspiracy theorist, whatever. This just seems all to easy.

After all, lets look at the reasons we've been given for high fuel prices:

Instability in the Middle east (yeah, that's all fine right now). Iraq is a mess, Iran is going to be a mess.

Demand. Are there suddenly less cars on the road? Did China stop driving all of a sudden?

Reserves. Prices were out of control before Katrina. We are told it's Katrina's fault. No, it wasn't. Certainly it didn't help that those rigs and refineries were shut down, but prices were well on the rise before with no *emergency* situation. They raise prices because they can, pure and simple, they just need an excuse. Any flimsy one will do.

Billions of dollar profits allow a little room for easing the prices. The part in power is hurting a little bit in the polls (and that could work either way), and this is an issue that effects us all.

And here's an example. Rick Santorum is one of my Senators. I wrote a letter when fuel started going stupid. The reply was "it's a free market and we can't do anything to control it". Then just last night I saw an ad on TV for him telling us how he's fought to control rising oil and energy prices. Crap so deep I almost drown. Did he lie then, or now?

I'd like to say mark my words, but I don't know 100% for sure that fuel will go back up. But I for one, won't be AT ALL surprised if it gets back to $3 a gallon right after the elections.

Prices down to $2.25 for 87 octane here. Of course, now that the wife and I have gotten used to carpooling, I don't plan on stopping just because prices are down again.

I was amazed to see a station near my house selling 93 for $2.79/gallon and then even more amazed to see a station 5 miles up the road selling 93 for $2.59. Ten miles round trip to save 20-cents a gallon = no brainer. (IMG:http://www.frrax.com/rrforum/style_emoticons/default/smile.gif)

Pat

Something tells me they're just teasing everyone now, but I'll enjoy the savings while I can.

The BP on the corner is $2.10 / gal for regular, $2.30 for premium. I just wonder how long it will last......

Wow! That's low! The lowest I saw today was $2.69 for regular.

I haven't changed my driving one bit. My work schedule varies all the time so carpooling would drive my fiancee nuts. Honestly prices have yet to get to the point for me personally to change anything.

....me too.... (IMG:http://www.frrax.com/rrforum/style_emoticons/default/ph34r.gif)

I'm not much of a conspiracy theorist, but I'm afraid I agree with you. It is not in the best interest of the oil companies for oil prices to be an election issue, regardless of who is running. By Thanksgiving, with lots of people going on long road trips, prices will be shooting up again, because they can.

One of the things I saw today (on tv) was a gas price sign showing less than 2.00 a gallon, but the diesel price was still very high, 2.74 I think. I have been seriously contemplating buying a VW Jetta diesel, but if diesel doesn't drop, I can be very happy with the gas version which gets very good mileage as well. BTW, isn't diesel the cheapest fuel to make?



I know politicians will say almost anything that will help them get elected. I hate that - but honesty and politics usually have nothing in common. You should send the letter back and ask for clarification. I also don't think Santorum's entirely correct when he says "we can't do anything to control it (pricing)." There are plenty of methods to control it, just not the way the Senator thinks WE think it should be controlled. Setting aside gas taxes, or some other type of fiscal relief, would provide a temporary/permanent adjustment for the consumer.

I also think the pricing will continue to fall, and will not rise back to $3/gal levels for some time (6 mos/1 yr?) Got no real evidence to support that, but maybe...

I think we could have lower prices in general if we had more refineries/processing capability, coupled with more uniform refining standards. There should be some type of control created that does not allow one state to cause the gas companies to manufacture a specific blend of gas just to meet the state's emission critieria. (I realize that goes against any state's rights argument, but that's a different soapbox...)

woohoo... it went below the 4$ / gallon.
has been so long it never reach such a low number here.

I bet this is killing the E85 people. I was watching Motorweek the other day and they were doing a follow up on how popular it was becoming in the midwest, probably mainly due to it's lower price at the time. The signs they were showing were around $2.80 for regular unleaded and around $2.25 for E85. If regular unleaded falls back below the E85 price for a good while, I bet it'll really retard the sale of E85 new vehicles.

That's the nice thing about the flex-fuel vehicles - if gas goes down you can just switch back.

The thing about E85 is that even if it costs less per gallon, it's not necessarily cheaper - since the MPG on E85 is less than gasoline. Has anyone heard any real life MPG comparisons between the two?

Car and Driver (or maybe Road and Track) did...... it was significantly less. Math said a car that gets 30 on gas would be about 21 on E85. Makes sense giving that 10% Ethanol hurts mileage a MPG or two. I don't know if E85 is the answer, but it's a help. I'd love to run Biodiesel in my truck, but I'll be damned if I can find it around here.... (IMG:http://www.frrax.com/rrforum/style_emoticons/default/sad.gif)

There's a biodiesel station about 10 miles from my house, cheaper for sure. 40 gal. minimum, though.

You can make it yourself. I saw an episode of 'Trucks' where they made their own biodiesel. I don't remember the name of the company that made the equipment, but the price didn't seem that bad for someone who needed larger volumes of fuel. The process seemed pretty simple and the only thing you needed was used cooking oil and (I think) lye.

If I can find the company name, I'll post it for you.