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Gas, oil costs start to decline

Economists credit changes from U.S. consumers

By Patrice Hill (Contact) | Friday, July 25, 2008

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Gasoline prices appear to have peaked for the summer and oil prices are not far behind, thanks to significant cutbacks in driving and increases in fuel efficiency.

American lifestyle changes prompted by $4-per-gallon gas — consolidating trips and opting for smaller cars or public transportation — have contributed to record losses for Ford Motor Co. and General Motors Corp.

Prices for regular gas have declined from a high of $4.11 a gallon a week ago to $4.03, and have dropped below $4 in parts of Virginia, Maryland and 24 other states, according to AAA Mid-Atlantic. Prices should stabilize barring a catastrophe such as a Middle East war or a hurricane hitting offshore oil rigs, analysts say.

"The drop in gas prices might not be as spectacular as some motorists had been hoping for," said AAA representative John B. Townsend II, "but we might be seeing the beginning of a trend toward lower pump prices."

Mr. Townsend attributed the decline in the past week to a record $21 fall in premium crude prices from a high of $145 a barrel on July 11.

Other analysts say pump prices never caught up with soaring oil prices this year, thanks to lackluster demand from consumers that prevented oil companies from passing on the full costs of higher crude. The total miles traveled in the U.S. between November and April dropped by 2.25 percent from the previous year - the biggest decline in nearly three decades — even before oil prices neared $150 a barrel, according to the Federal Highway Administration.

"The question now is just how much further oil demand will drop" as the economy weakens this year, said Harm Bandholz, an economist with UniCredit Markets.

He estimated that miles traveled per car has been on the decline since 2004, taking into account that Americans drove fewer miles even as the number of registered cars increased.

"Households and firms finally adjusted their petroleum consumption as they felt that oil prices would remain elevated and as prices have exceeded certain critical thresholds," Mr. Bandholz said.

This year, oil consumption has fallen by 800,000 barrels a day in the U.S., or 4.25 percent from last year, suggesting that the decline accelerated as the economy weakened, he said.