Gasoline Prices Go Against the Flow

A funny thing happened on the way to $2.50-a-gallon gas this summer. It didn’t get there.

The average price for regular self-serve gasoline in California has now fallen for nearly three months, to just above $2 a gallon, the Energy Department reported Monday. That comes despite the busy summer driving season and a spurt in crude oil prices to record highs of nearly $50 a barrel.

Experts disagree over whether the price break may be ending for California, as it already has for other parts of the country. Some say that with crude so expensive, it’s only a matter of time before pump prices start climbing too. Others maintain that with the summer driving season winding down, the decrease in demand should help prices drift even lower.

But what everybody seems to agree on is that the last few months have been mighty strange at the gas station.

As Californians celebrated Memorial Day, the average price of regular gasoline in the state hit a record-high $2.327 a gallon. With supplies tight and motorists just starting to hit the road for the summer, it seemed plausible that gasoline might reach $2.50 or more a gallon. Crude oil at the time sold for about $40 a barrel.

Responding to the sharp rise in pump prices, state lawmakers vowed to investigate whether oil companies were manipulating the market. The state Senate launched an investigation of the industry’s tactics, creating a select committee headed by Sen. Joe Dunn (D-Santa Ana). That probe continues.

Yet ever since then, pump prices have steadily fallen.

In the week ended Monday, the average price for regular in California slipped an additional 0.4 cent to $2.051 a gallon, its 12th consecutive weekly decline, the U.S. Energy Department’s Energy Information Administration said in its weekly survey.

The average price in California is a nickel a gallon cheaper than a year ago, the agency said. And regular gasoline is selling below $1.90 a gallon at some service stations in Los Angeles and Orange counties.

Crude oil, meanwhile, continues to hover near record levels, even though it fell 67 cents, to $46.05 a barrel, on Monday on the New York Mercantile Exchange.

So, why did pump prices turn south even as crude oil prices have kept heading north?

The overriding reason, analysts say, is supply, supply, supply.

Last spring, oil refiners saw a perfect opportunity to boost their production. Demand for gasoline had risen sharply in the spring, yet gasoline supplies were constrained. Refiners realized they could capture hefty profits by opening up the spigots and producing as much gasoline as possible.

“At that point, people were concerned about having adequate supplies,” said Steve Enger, an energy analyst at investment firm Petrie Parkman & Co. in Denver. “The U.S. refining system was going to have to run all out for a couple of months to be in decent shape, and that’s basically what happened.”

Indeed, refiners operated nearly flat-out to produce gasoline, running at about 97% of their capacity at times. They also enjoyed a stretch of good luck, avoiding the kinds of major disruptions, such as a fire, that often knock refineries off line and cause a temporary spike in gasoline prices.

At the same time, gasoline imports to the U.S. increased sharply. In July, the nation imported 1.07 million barrels of gasoline per day, the third-highest monthly import figure ever, according to the American Petroleum Institute, an oil industry trade group.

The result: Gasoline inventories gradually kept building through the summer. There were enough supplies to satisfy motorists’ demand for fuel and then some, enabling prices to fall back.

The refiners also captured the gains they had sought. Valero Energy Corp., for instance, earned more money in this year’s second quarter -- $633 million -- than it did in all of 2003.

Motorists did their part too. The record-high gas prices around Memorial Day prompted some drivers to conserve, further helping supplies to swell this summer.

Demand “has not been as high as anticipated,” said Carol Thorp, a spokeswoman for the Automobile Club of Southern California. The club suspects the decline is coming from commuters who are finding other ways to get to work, including public transit or carpooling.

The latest run-up in crude oil prices, which began two months ago, finally showed up in retail gas prices during the last week in most states outside of California. The average U.S. price had fallen in nine of the last 12 weeks.

In its survey Monday, the Energy Information Administration said the nationwide average gasoline price edged up nearly a penny, to $1.884 a gallon, and it remains 13.7 cents higher than a year ago. Several East Coast cities are paying 15 cents to 20 cents a gallon more than a year earlier.

Gasoline prices typically move up ahead of Labor Day as service station owners take advantage of the summer’s last official vacation weekend. Then, as schools reopen and motorists’ demand for gasoline tapers off, prices tend to sag.

What will happen this time, though, is far from clear.

As high prices for crude oil work their way to the retail market, some believe, it could offset the normal pattern and prevent further declines at the pump.

“It’s anybody’s guess, but with the market so tight, and with crude going up, I cannot believe that prices will continue to drop,” said Will Woods, executive director of the Automotive Trade Organizations of California, a Tustin-based trade group for independent station owners.

Valero Energy, which has two major refineries in California, has noticed wholesale gasoline prices moving up in the last two weeks. Given that, “we would expect street prices to increase some over the near term, but not necessarily to the peak we saw in May,” said Mary Rose Brown, a spokeswoman for the San Antonio, Texas-based company.

Others aren’t so sure, pointing to continued high refinery output and gasoline imports.

“If supplies remain steady,” said the Auto Club’s Thorp, “we could see a continued price decrease through Labor Day and beyond.”