Gasoline prices likely won’t set any records this summer, thanks to a recent drop in the price of oil.
The government on Tuesday slashed its forecast for average gas prices to $3.79 per gallon for the summer driving season. That’s down from an initial estimate of $3.95 and slightly below 2008’s record average of $3.80.
The Energy Information Administration’s revised forecast is encouraging news for the economy. Some economists blame high pump prices for so-so consumer spending this year. They were also seen as a factor in the loss of 35,000 retail jobs in February and March.
Gasoline prices soared 20 percent from January to early April.
A few analysts has previously warned drivers that they could pay as much as $5 this summer, eclipsing the 2008 record of $4.11 per gallon.
That has changed. The price of benchmark crude has dropped about $8 per barrel since early April. Retail gas prices have followed, falling 17 cents since reaching $3.936 on April 5.
Last year, drivers paid an average of $3.71 per gallon from April to September, a period the government considers the peak driving season.
Europe helped sink oil prices as well. Some European countries are in recession and election results in France and Greece over the weekend threaten to derail the eurozone’s plan for recovery.
Oil is down nearly 12 percent since peaking near $110 per barrel in February. As oil prices fall, it becomes cheaper for refineries to make gasoline and other fuels, and some of that savings eventually gets passed along in the form of cheaper pump prices.
Lower gasoline prices will allow many drivers to keep a few extra dollars in their pocket every time they fill up. That could encourage more drivers to take their cars out for a spin this summer, but overall demand is expected to be lower than last year.
Oil dropped to four-month lows on Monday, on worries that election results in Europe could thwart efforts to contain the euro zone debt crisis and after weak U.S. jobs data prompted concern about oil demand growth.
Oil prices, which have fallen for four straight sessions, suffered a sell-off on Friday after data showing U.S. nonfarm hiring slowed for a second month in a row in April, fuelling fears of falling demand in the world’s top oil consumer.
This was compounded by the outcome of elections in France and Greece that raised concerns over their ability to implement further austerity measures seen as key to tackle the region’s debt crisis.
U.S. crude futures were down 91 cents at $97.58 a barrel, after dropping to as low as $95.34, its weakest since Dec. 20, 2011. U.S. oil fell by around four per cent on Friday, its biggest drop since December, to break below $100 for the first time since February.
The weekend elections in Europe continued to provide focus, with French voters ousting Nicolas Sarkozy, an architect of bailouts for indebted countries and an advocate of austerity measures.
In Greece, consensus-building appeared challenging after the leader of the Democratic Left party Fotis Kouvelis, which secured 6.1 per cent of the votes on Sunday’s election, refused to join any pro-bailout coalition of the conservative New Democracy and Socialist PASOK parties.
Higher supply from the 12-member Organization of the Petroleum Exporting Countries (OPEC), which is pumping 32.3 million barrels per day (bpd) — 2.3 million bpd more than OPEC’s target of 30 million bpd, also weighed on oil prices.
The extra OPEC oil has offset a decline in exports from Iran, which is facing stiffening Western sanctions over its disputed nuclear energy programme.
U.S. utilities led by Southern Co. are burning a record amount of natural gas for generating electricity without triggering a forecasted boost to the fuel’s price from near 10-year lows.
The power companies used 34 percent more gas in February than a year earlier, Energy Department data show. Utilities are the nation’s biggest gas consumers.
Marketed gas production reached a record 66.22 billion cubic feet a day in 2011.
The historic switch to gas is set to peak this year without fulfilling industry predictions that it would eat up inventory and drive up gas prices. That’s because unparalleled output from new shale fields is oversupplying the $95 billion U.S. gas market, postponing relief for hundreds of producers.
Record gas use “may not be the panacea that people think” it will be, Jason Schenker, president of Prestige Economics LLC, based in Austin, Texas, said in a telephone interview. Schenker was the fourth-best predictor of gas prices in the first quarter, according to data compiled by Bloomberg.
The difficulty of forecasting fuel prices led managers of two energy funds to close in the last four weeks, including John Arnold’s Centaurus Energy Master Fund.
While benchmark U.S. gas prices have gained about 38 cents from an intraday low of 1.90 per million British thermal units on April 19, most analysts are not calling the bottom of the price cycle for a fuel that traded above $13 in 2008. June’s pricing is at 2.34 on May 7.
Bulging gas stocks are also being sustained by a combination of unusual weather that’s depressing electricity sales, as well as decisions by power company executives to avoid becoming over-reliant on the historically volatile fuel.
Marketed gas production reached a record 66.22 billion cubic feet a day in 2011 and may rise another 4.5 percent this year, according to Energy Department estimates. Inventories rose to 2.576 trillion cubic feet the week ended April 27, 50 percent above the five-year average for the week, the agency reported May 3.
Cheap gas, rather than helping power producers like Southern, undercuts their revenue because it drives down wholesale electricity prices, squeezing margins for plants that run on nuclear, renewable and coal power. The utilities, for many reasons, are close to their limit of shifting the mix toward gas.
Meteorologists say the fourth-warmest winter on record that just ended will be followed by a cooler summer for much of the U.S. compared with a year ago. If weather remains mild, total power consumption will be 1.8 percent lower from July through September from a year earlier, the Energy Department said.
The power sector is predicted to account for 35 percent of total U.S. demand this year, up from 31 percent last year, Energy Department data show. The trend has accelerated as gas prices fell in much of the country below coal, traditionally the second-cheapest source of power behind nuclear energy.
