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Oil prices fall; gas may soon follow

Barring major changes, consumers can expect to pay about 20 cents less per gallon at the pumps in a month, an analyst says.

Published January 12, 2007


NEW YORK - Oil plunged below $52 a barrel Thursday to its lowest price since May 2005, extending a sharp decline that has been led by dampened heating oil demand, but which could save consumers money on a more widely used fuel: gasoline.

Crude oil has tumbled by 15 percent so far this year in a huge selloff that was kicked off by investment funds last year, and then stoked by a warm U.S. winter that has left supplies of heating fuel barely touched.

Global Insight energy analyst Kevin Lindemer said that typically, for every dollar the price of crude goes down, prices at the gas pump drop 2 to 2.5 cents.

With crude down by about $9 from December, drivers should be paying about 20 cents less per gallon in a month or so, he said, if crude prices hold at current levels. The average U.S. retail price of gasoline was $2.28 on Thursday, down a cent from a month ago, according to AAA. The average Tampa Bay area price Thursday matched the national number, while the state average was $2.32.

Of course, the energy markets are volatile, and if crude bounces back up to $60 a barrel, pump prices won't budge much.

"The impact of the weather should not be overstated. Heating demand is a comparatively small part of global consumption," said Antoine Halff, an energy analyst at Fimat. "There's potential for a rebound."

Light, sweet crude for February delivery dropped $2.14 to settle at $51.88 on the New York Mercantile Exchange, after dropping as low as $51.80. It was the lowest settlement price since May 27, 2005.

Adding to the price slide Thursday was the resumption of oil shipments through Belarus to other parts of Europe, and the belief that the Organization of Petroleum Exporting Countries won't announce another production cut just yet to stall the market's drop.

Many traders suspect that OPEC members aren't even complying with the cuts they've already announced. OPEC decided late last year to reduce production by 1.2-million barrels of oil a day starting last November, and 500,000 barrels a day set to begin Feb. 1.

It's hard to say where the oil market is headed: up to the $60-a-barrel level it had been hovering at since September until recently, or down to the $40-a-barrel level of two years ago.

Large speculators, mostly commodity funds, have been betting prices will keep falling, while commercial accounts - companies that deal with oil in their business and use the market to hedge losses - have largely bet on a rebound.

Crude oil's steep decline follows an eight-year bull market, which led oil from a low of $10.35 a barrel in 1998 to a record high above $78 last summer.

Impact at the pump

On Thursday, a barrel of light, sweet crude for February delivery closed at $51.88 on the New York Mercantile Exchange and has dropped about $9 since December. So will there be a corresponding decrease in gasoline prices, and if so, by how much?

Kevin Lindemer, an energy analyst at Global Insight, says that for every dollar drop in the price of crude oil, the price of a gallon of gas should drop about 2 to 2.5 cents, although it often takes up to a month to see the full decrease, if prices hold steady over that time. Given that, gas prices could be about 20 cents lower by early February, putting them slightly above the $2 mark.

[Last modified January 11, 2007, 23:55:41]

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