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Thursday, April 27, 2006

Market fuel prices drop

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Oil and gasoline prices took another tumble in New York trading yesterday on signs of increasing supplies and slackening demand in the United States and China, adding to an 18-cent drop in wholesale gas prices that likely will produce relief at the pump in the days ahead.

Since peaking above $75 last week, the price of premium crude oil has fallen to just under $71 yesterday on the New York Mercantile Exchange, while gas for delivery in May has plummeted to $2.07 a gallon after touching a high of $2.25.

Pump prices have flattened out at $2.92 nationwide for regular unleaded, 50 percent higher than they were in February but not yet reflecting the declines in the futures and wholesale markets.

The biggest factors causing price drops have been signs that demand for gas is running about 1 percentage point behind last year's level -- most likely in response to the rapid run-up in pump prices since last month -- even as refineries are racing to take advantage of high prices and increase scarce supplies of summer fuels.

"At the end of the day, the best cure for high prices is high prices," said David Hackett, president of Stillwater Associates LLC, an energy-consulting company, noting that consumers are angry about high prices and apparently are beginning to balk at paying them.

U.S. Energy Department figures show that demand for fuel at gas stations over the past month was running 44,000 barrels below last year's levels, while supplies rose by 231,000 barrels. Refineries gearing up for the summer driving season operated at 88.2 percent of capacity last week, up 2 percent from the week before.

Also easing pressure on fuel prices yesterday was a move by China to raise interest rates to slow down its torrid 10 percent annual growth rate. China is the second-largest consumer of oil behind the U.S.

The U.S. Federal Reserve also has been raising interest rates to cool demand and head off a bout of inflation that it fears could be sparked by high energy prices. Fed Chairman Ben Bernanke testified yesterday that high gas prices pose "risks" for economic growth as well as inflation. When gas prices topped $3 last fall, they helped to deflate U.S. economic growth to a sluggish rate of 1.6 percent.

Mr. Bernanke said he expects this spring's jump in gas prices to shave "a few tenths" of a percent off economic growth in the spring quarter but not endanger the economy overall. He says he sees little respite from chronically high energy prices in the next few years, as supplies are barely growing fast enough to keep up with demand for fuel worldwide.

Mr. Bernanke said a so-called "windfall profit tax" on oil companies gaining popularity on Capitol Hill would not result in an increase in supplies.

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