TOPICS : Why gasoline prices could ease soon

After the price of oil hit a high of $75.17 a barrel last month, demand in the US dipped a few per cent. Demand by other developed economies has also eased in recent months, reaching a level that’s actually lower than a year ago.

Oil markets started to factor in some of these supply-and-demand dynamics last week: The price of crude oil fell below $70 a barrel on Thursday. By Friday, however, it had inched back above $71 a barrel, following news about Iran and a tropical depression headed toward the Gulf of Mexico.

Still, lower prices are a good sign for consumers — and the price of the hydrocarbon could stabilise or drop more if, as widely expected, both the US and global economies grow at a slower pace for the rest of the year. “Demand is falling because of a response to higher prices,” says economist Mark Zandi of Moody’s “Layer on weaker economic growth, and you will see a measurable decline. Ultimately, prices will moderate.”

The trend could have broader ramifications, too. If the easing were to continue, economists say it could help provide a cushion that might smooth out potential supply disruptions, such as from civil unrest in an oil-producing area. Lower or stable oil prices might also relieve policymakers at the Federal Reserve who are worried about the inflation rate. And eased prices might give lawmakers some respite this fall when they face voters.

But some experts caution it’s far from certain that oil prices will stay lower. “The next headline gets us to $80 a barrel: There is not going to be an epiphany of reasonableness anytime soon,” says Mike Fitzpatrick, a US oil trader. “I’m not saying prices won’t fall because of economic contraction, but it’s still too early to say the signs are showing that.”

The last time oil consumption fell was the recession that started in 2001. Oil prices were in the $20- to $25-a-barrel range, and gasoline cost about $1.40 a gallon. “No one is saying oil is going back to $20 a barrel, but the debate is whether it goes down to $60 a barrel or up to $80,” says Zandi. A poor economy can affect gasoline sales as disposable income shrinks, notes energy analyst Mark Routt of Energy Security Analysis Inc. in Wakefield in the US. But, Routt adds, only a small portion of gasoline sales responds to price. “The price of gasoline is up 40 per cent over last year, which is up 40 per cent over the year before. Yet gasoline consumption still grew,” he says.

The steady rise of gasoline prices, combined with increased food costs, higher interest rates,

and a slowing of the housing market, are already stretching consumer budgets, argues Ken Goldstein, an economist at the Conference Board, a business research group in New York. He expects consumer spending to drop from four to five per cent growth rate last year to about two to three per cent in the second half of this year and into 2007. “If consumers are spending at three per cent or less this year, it provides less of a cushion for the economy if another hurricane hits,” he says. — The Christian Science Monitor