Gas, oil costs start to decline
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.
Mr. Bandholz and many other analysts expect the economy to weaken further by the end of the year, indicating a steeper decline in fuel consumption. Reports released Thursday showed a jump in claims for unemployment benefits to more than 400,000 last week — jobless levels associated in the past with recession — while existing home sales continued their descent last month and were down 15.5 percent from a year earlier.
The developments sent the Dow Jones Industrial Average tumbling 283 points.
In the past, such a marked slowdown by the world’s largest oil consumer would have caused an immediate drop in oil prices, but this year oil prices defied the U.S. trend and continued their spectacular rise on the strength of growing demand in China, Russia, India and other developing countries.
While it took longer to have an effect, the faltering U.S. economy is starting to pull back growth in other areas, particularly Europe and Japan, and weigh on global oil prices.
Oil prices plunged last week amid an intensification of the U.S. credit crisis that forced the U.S. Treasury to organize a rescue for mortgage titans Fannie Mae and Freddie Mac.
Lehman Brothers, a Wall Street firm that has led the charge toward higher oil prices this year, this week altered its forecast and said oil and other commodity prices probably have peaked.
“It appears that the long-awaited commodity price correction has finally arrived,” said Lehman analyst Jim McCormick, noting that demand for oil is declining worldwide. Lehman expects premium crude prices to end the year at $110 a barrel — down significantly from $125.49, where they closed in New York trading Thursday.
In the U.S., Daniel Yergin, chairman of Cambridge Energy Research Associates, said oil prices above $100 per barrel and gas prices exceeding $4 per gallon appear to have marked a breaking point for consumers and political leaders.
“We are seeing the beginning of a powerful response,” including a “sharp shift towards fuel economy in the minds of consumers when they enter an auto showroom,” increased use of public transportation and carpooling, and enactment of the first increase in automobile fuel-efficiency standards in 32 years in December.
The changes are forcing automakers to abandon money-making strategies based on building big cars and sport utility vehicles and to expedite changes in design and engines to increase fuel efficiency, something of “great significance and lasting importance” and involving “great cost in very difficult circumstances,” Mr. Yergin said. Ford reported a record $8.7 billion loss Thursday, for a total $24 billion in losses since 2006, as consumers rejected SUVs and trucks.
As a result, last year probably marked the peak in U.S. gasoline consumption, Mr. Yergin said. “This has worldwide effects. For the nine-plus-million barrels of gasoline that the U.S. uses every day is larger than the total oil consumption of any other nation, including China.”