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By Samuel R. Avro on Nov 23, 2008 with no responses

Don’t Count on Gas Costs Staying Low


Could the era of cheap fuel be back?

Oil costs one-third what it did this summer. Gasoline prices now average less than $2 per gallon, their lowest level in more than three years. Although California is a bit more expensive – about $2.20 per gallon – prices here are falling every day.

So is this a return to the golden age of inexpensive, plentiful fuel? Probably not, many experts warn.

For one thing, oil still costs roughly twice its historic average. At $49 per barrel, it only looks cheap in comparison to this past summer, when it reached $145.29 on the New York Mercantile Exchange. In addition, the oil bubble did not pop because new supplies of crude suddenly flooded the market. Worldwide oil production has been flat for years. Instead, the bubble popped because the global economy started spiraling into recession, and recessions lower the amount of oil that countries consume. Speculative investors who had driven oil to record heights this summer had been willing to ignore gloomy economic data so long as it seemed confined to the United States. Once it became clear the rest of the world also was sliding, they started selling en masse. Whenever the recession ends, demand for crude will start rising again. So will its price.

“If we had a really robust depression, we could see $20 or $30 oil,” said Amy Myers Jaffe, an energy research fellow at Rice University’s Baker Institute. “But it’s not going to stick when we come out.”

Delicate balance

And because the current lower prices give oil-producing countries less money to invest in developing their oil fields, the delicate balance between supply and demand could quickly tighten again, she said. In an effort to shore up prices, the Organization of the Petroleum Exporting Countries is scaling back production, not expanding it.

“We weren’t keeping pace as it was,” Jaffe said. “We’re still going to come out at the other end of the (recession) with more people in China and India having a car. So then you have to ask the question, in five years, where’s that oil going to come from?”

That means the American consumer is probably facing a brief price break, one that could last months or even a year or two but won’t herald the start of a new era. Still, most people will welcome the break.

This decade’s rising prices for oil and gasoline have insinuated themselves into all aspects of the economy, costing consumers and businesses in many ways. Plane ticket prices jumped as airlines struggled to pay for jet fuel. Food prices rose worldwide, triggering riots in some countries. Any company that transports its products by cargo ship, truck or train had to find ways to cover the rising cost of fuel, usually by passing it on to customers.

Article continues: San Francisco Chronicle