Amy Sancetta  /  AP
Experts who had been all-but-guaranteeing a national average of more than $3 per gallon by Memorial Day now say prices have probably peaked.
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updated 5/12/2010 5:44:58 PM ET 2010-05-12T21:44:58

Gas prices are poised to fall as Memorial Day approaches, a welcome change for motorists who have gotten used to seeing increases cut into their summer vacation money.

Experts who had been predicting a national average of more than $3 per gallon by Memorial Day now say prices have likely peaked just beneath that threshold. Rising supplies and concerns about the global economy have helped send wholesale gasoline prices plummeting by 25 cents a gallon since last week.

"Gasoline supplies are about as good as they've ever been going into the summer driving season," says oil analyst Phil Flynn of PFGBest in Chicago.

The decline in prices is starting to filter down to motorists, but it will take several weeks for the full effects to be reflected in pump prices, which average $2.91 nationwide.

By summer, the nationwide average could be below last summer's peak of around $2.70 a gallon, says Tom Kloza of Oil Price Information Service. In July 2008, the retail price of regular gasoline peaked at $4.11.

Economists say the coming drop in energy costs will not have a significant impact on overall consumer spending or economic growth. But motorists will feel better having a little more money to save or spend on clothes, dinner or a summer vacation.

Chrystal Harned, who paid $3.01 a gallon the other day, says she will be more likely to take a road trip this summer if prices fall.

"It's good to go see people and get out of the town and spread your wings a little bit," says the 36-year-old waitress and bartender, who lives just outside Rochester, N.Y. She says business is picking up these days, but "you don't want to put it all in the gas tank."

Oil prices declined
Since May 3, oil prices have declined by 12 percent to $76.20 a barrel. Wholesale gasoline prices have declined by 10 percent to $2.19 a gallon.

Analysts were forecasting a nationwide retail average well above $3 a gallon just a few months ago. So what changed?

  • The European debt crisis escalated. This undermined confidence in the strength of the global economic recovery and prompted analysts to lower their energy demand forecasts. The crisis also sent institutional investors flocking to the dollar, a relative safe haven. And, these days, when the dollar goes up, the price of oil goes down.
  • Supplies of gasoline have risen steadily. As of April 30, the U.S. had 225 million barrels of gasoline in storage — about 5 percent more than a year ago. Output from refineries has been growing at a faster pace than demand.
  • Political unrest in oil-producing nations has been muted. This is a wild card that could change quickly. But lately, violence in Nigeria and tensions in the Middle East have been relatively minor, traders say.

The massive oil spill in the Gulf of Mexico has had no impact on fuel prices because it's had only minimal impact on petroleum production, analysts say.

Predictions of $3-a-gallon gas have come true in 10 states, including California, Hawaii, Illinois, New York and Nevada. Distance from the nation's refining hub along the Gulf Coast or high taxes are contributing factors.

If pump prices fall by 25 cents per gallon — in line with the decline at the wholesale level — that will knock about $12.50 off the fuel bill of a typical motorist burning 50 gallons a month.

Economist Ken Mayland of ClearView Economics suspects most drivers will view the lower prices as temporary and that they'll pocket the savings.

The federal government's Energy Information Administration has been forecasting a nationwide average of $3 a gallon for at least a part of the driving season. It's not ready to concede that gasoline prices have reached their high point.

EIA's Tancred Lidderdale said a resolution to the debt crisis in Europe, a decline in the dollar and fresh signs of global economic growth could send oil prices back up.

"The market is volatile," he says.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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