http://www.newsobserver.com/104/story/486039.html

Oil's slide could push gas to $1.15
Tension in oil-producing regions is easing, and stockpiles of crude are approaching 1990 levels

Kevin G. Hall, McClatchy Newspapers
WASHINGTON - The recent sharp drop in the global price of crude oil could mark the start of a major sell-off that returns gasoline prices to lows not seen since the late 1990s -- perhaps as low as $1.15 a gallon.

Philip K. Verleger, a noted energy consultant who was a lone voice several years ago in warning that oil prices would soar, now says that they appear to be poised for a dramatic plunge.

Crude oil prices have fallen about $14, or roughly 17 percent, from their July 14 peak of $78.40. After falling seven straight days, they rose slightly Wednesday in trading on the New York Mercantile Exchange, to $63.97, partly in reaction to a government report showing fuel inventories a bit lower than expected. But the overall price drop is expected to continue, and prices could fall much more in the weeks and months ahead.

Here's why.

For most of the past two years, oil prices have risen because the world's oil producers have struggled to keep pace with growing demand, particularly from China and India. Spare oil production capacity grew so tight that market players feared that any disruption to oil production could create shortages.

Fear of disruption focused on fighting in Nigeria, escalating tension over Iran's nuclear program, violence between Israel and Lebanon that might spread to oil-producing neighbors, and the prospect that hurricanes might topple oil facilities in the Gulf of Mexico.

Oil traders bet that such worrisome developments would drive up the future price of oil. Oil is traded in contracts for future delivery, and companies that take physical delivery of oil are just a small part of total trading. Financial players, such as large pension and commodities funds, are the big traders and they're seeking profits. They've sunk $105 billion or more into oil futures in recent years, according to Verleger. Their bets that oil prices would rise in the future bid up the price of oil.

That, in turn, led users of oil to create stockpiles as cushions against supply disruptions and even higher future prices. Now inventories of oil are approaching 1990 levels.

But many of the conditions that drove investors to bid up oil prices are ebbing. Tension over Israel, Lebanon and Nigeria are easing. So far this year, the hurricane season has presented no threat to the Gulf of Mexico. The U.S. peak summer driving season is over, so gasoline demand is falling.

With fear of supply disruptions ebbing, oil prices began sliding. With oil inventories high, refiners that turn oil into gasoline are expected to cut production. As refiners cut production, oil companies increasingly risk getting stuck with excess oil supplies. There's already anecdotal evidence of oil companies chartering tankers to store excess oil.

All this is turning financial markets increasingly bearish on oil.

"If we continue to build inventories, and if we have a warm winter like we had last winter, you could see a large fall in the price of oil," said Gary Pokoik, who manages Hedge Ventures Energy in Los Angeles, an energy hedge fund. "I think there is still a lot of risk in the market."

As it stands now, the recent oil-price slump has brought the national average for a gallon of unleaded gasoline down to $2.59 a gallon, according to the AAA motor club.

Should oil traders fear that this price slide will get worse and run for the exits by selling off their futures contracts, Verleger said, it's not unthinkable that oil prices could return to $15 or less a barrel, at least temporarily. That could mean gasoline prices as low as $1.15 per gallon.

Other experts won't guess at a floor price, but they agree that a race to the bottom could break out.

"The market may test levels here that are too low to be sustained," said Clay

Seigle, an analyst at Cambridge Energy Research Associates, a consultancy in Boston.

On Monday, the oil-producing cartel OPEC hinted that if prices fall precipitously, OPEC members would cut production to lift them. But that would take time.

"That takes six to nine months. If we don't have a really cold winter here (creating a demand for oil), prices will fall. Literally, you don't know where the floor is," said Verleger. "In a market like this, if things start falling ... prices could take you back to the 1999 levels. It has nothing to do with production."
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YAY FOR SUVEES!

2.48 here

I'll believe $1.15 gas when I see it. I'm just happy it's back below three.

Yes plummeting.

ZOMG!



Just in time for mid-term elections.

HAHA...

PLEASE, I'm begging you, elaborate.

this is gonna be GREAT!!!

i stand corrected

2.45 this morning

I hope it continues to drop

$2.09 here

This is what my dad (mind you, a hard core republican) said.

ditto. i drive for work and my reimbursement is pitiful.

does he understand the determinants of gas prices? doesn't sound like it.

Don't you know that the Bush Administration controls gas prices and that Karl Rove gave the directive to lower prices to benefit Republican candidates?
Don't forget that we are dealing with evil people, and to think that an event like Hurricane Katrina or an escalation of world demand couldn't have anything to do with it. Just go with the mantra....BLAME BUSH FIRST.....BLAME BUSH FIRST.

I was reminiscing the other day about how there was a point when I was in law school in Carlisle, PA (a place with notoriously cheap gas, and the world's largest truck stop) that gas cost $.89. It usually hovered around a dollar from 1996-99 when I was there. I had a Jeep Cherokee and I could fill it up for under $20. In fact the whole time I had that car throughout the 90's, I assumed that $20 was the amount to fill the tank, sometimes it was a little more or less. When I got my Civic in November 2001, I used to be able to fill it up for $12-13.

This morning I spent over $37 to fill my Oldsmobile, and gas prices where I live have dropped nearly 30% from the highs earlier this summer. While I welcome the respite from $3.00 per gallon, I don't want to see prices drop too much in the short term and begin encouraging people to waste gas on guzzlers again. People's attitudes were just beginning to changes from "why are gas prices so high?" to "I ought to think about getting a smaller car". If if goes below $2.00, all that progress may be lost.

And even knowing the mechanisms of how gas prices are determined, it's hard to not be cynical about the timing of this extreme drop in prices.

my thoughts exactly - the "wave" of subcompacts that are also actual automobiles and not boxes with wheels and a tiny engine just got underway in America earlier this year - I'd hate to see a "sigh of relief" from the consumer base equated to new record sales for the H3.

Have you ever heard of the rhetorical device called "Poisoning the well"?

Absolutely...we've all become familar with this concept since November 2000

Then I probably don't need to elaborate.

I just bought a house that uses oil heat. Does this mean that I should wait a few more weeks before I get the tanks filled in my basement? I've only had gas in the past so I don't know anything about oil heat.