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By Peter Coy With the price of crude oil going through the roof, here's a man-bites-dog story: The price of gasoline at the pump has been falling. This is great news for motorists, if not for conspiracy theorists. Kitchen-table folklore says that the oil companies seize on every possible excuse to raise gas prices. Yet here's a case where oil has gone up a whole lot but gasoline hasn't.
You don't believe it? Well, let's look at the numbers. Last spring, shortly before Memorial Day, oil reached $42 a barrel, while the national average retail price of regular gasoline hit an all-time high of $2.06, according to the Energy Dept. Newspapers were full of stories quoting analysts who thought that if oil prices kept rising, gasoline nationwide could hit $3 a gallon before Labor Day.
Well, oil has gone up, all right. After briefly retreating to the high $30s, oil climbed above $42 a barrel in July and this week got up to $44, an all-time high for the most actively traded oil futures contract on the New York Mercantile Exchange. Oil has been driven upward by a whole range of causes: Unrest in Nigeria and Venezuela. An unprecedented legal dispute over the Russian oil company Yukos. Fears of terrorist attacks on oil infrastructure in the Mideast. And the biggie: Strong growth in worldwide demand for oil, which has outpaced the growth in supplies. The global oil market is tight.
STOCKING UP. Gasoline, on the other hand, is another story entirely. The national average pump price as calculated by the Energy Dept. has been moving gradually lower all summer. On Aug. 2, it hit $1.89 -- not exactly cheap, of course, but fully 17 cents below the pre-Memorial Day high. In Los Angeles, the price is down to $2.12 from a peak of $2.36. In Chicago, it's at $1.91, from $2.18. In Boston, it's also $1.91, down from a high of $2.10.
The explanation? The oh-so-ordinary forces of supply and demand. Last spring, supplies of gasoline in storage were low and participants in the market -- speculators and oil companies alike -- thought that there was a serious risk of shortages by the end of the summer. So they bought every gallon they could get their hands on in the spot and futures market. So gasoline went up even faster than oil, leading to record profits for refiners.
But then, at least on the gasoline front, some positive things happened. Attracted by the profit motive, refiners were able to ramp up the conversion of oil into gasoline faster than anticipated, while also meeting the demand for specialty blends in different parts of the country. And foreign refiners, seeing the profit opportunity, began shipping gasoline to the U.S. at a faster pace. On Aug. 4, the Energy Dept. reported that inventories of gasoline rose more than 2 million barrels last week, to 210 million barrels, the highest level since February, 2003. Meanwhile, growth in demand slowed a bit -- possibly because the high prices have persuaded consumers to cut back where they can.
MIXED FORECAST. With inventories at healthy levels, the fear has drained out of the gasoline market. The Energy Dept.'s report on growing gasoline stockpiles caused a sharp sell-off in the wholesale gasoline futures market, with the contract for September delivery plunging 8 cents, to just over $1.20 a gallon. That could lead to another drop in the pump price in the coming week.
With crude oil prices still sky-high, will the good news for gasoline prices continue? Well, the outlook is mixed. With stocks rebuilt, the big drop in the price of gasoline relative to the price of oil is probably mostly over by now. That means that from now on, if oil continues to rise, gasoline will, too. Another piece of bad news is that refiners put so much effort into refining gasoline this summer that they allowed supplies of heating oil to get low. So the Nymex wholesale price of heating oil for delivery in January, 2005, has gone up 20% since May, to $1.20 a gallon from $1. Diesel fuel, which is a close relative of heating oil, is also up.
The good news is that the price of crude oil is more likely to fall from these lofty levels than to go even higher. At least that's the way professional traders are betting: The price of crude for delivery next March is around $40, vs. around $43 for delivery next month. That's still extremely high, and something unexpected could still happen to drive oil prices toward $50 a barrel or beyond.
For now, there are reasons to look on the bright side. Last spring, the experts were talking about $3 gasoline this summer. Instead, gasoline is under $2 -- and the price has been falling. That's worth a sigh of relief, isn't it? Coy is economics editor for BusinessWeek in New York