September 3, 2006 - Vol. 11 No. 24

COULD A DROP IN GAS AND OIL PRICES FAVOR REPUBLICANS IN NOVEMBER?

According to the US Department of Energy’s Energy Information Agency (EIA) the nationwide average price of regular gasoline has dropped nearly 20 cents per gallon since the week of August 21 to $2.72 per gallon for the week of September 4.

What gives? Why the dramatic drop in prices?

Many things have happened.

-- The price of oil has dropped into the high $60’s from the high $70’s that was driven by instability in the Middle East. But, the month long war in Israel and Lebanon didn’t spread throughout the region as feared. Further, the US is now at a standoff with Iran with it increasingly unlikely that the US will take military action against the country.

-- The yearly end-of-summer drop off in driving is now underway - less gasoline is flowing at the pumps thus it is cheaper.

-- A slowing economy may be suppressing prices. Fewer trips to the store also mean less gas sold at lower prices.

-- People do seem to be switching to higher fuel economy cars. The automakers have cut back production of trucks and SUVs because of slow sales. (Though certainly unofficial, used car lots seem to be overflowing with SUVs -- at very low prices.)

-- The ethanol shortage that began at the first of the year seems to have ended. Fuel distributors that switched to ethanol reformulated gasoline to replace MTBE at the first of the year found high prices and a tight ethanol supply. That situation has eased and the price of ethanol has dropped from around $4.00 a gallon in June and July to a low of about $2.30 a gallon today, according to the California Energy Commission and the Oxy - Fuel News Price Report from Hart Publications.

That dramatic drop in the price of ethanol could be the major portion of the reduced price of gasoline in markets that use reformulated gasoline.

-- The hurricane season is far less active than predicted. (Yet anyway. But, as each day passes the less chance there is for a busy season.) Most of the damage done to oil facilities by Katrina and Rita last year has been apparently fixed as well.

High gasoline prices have been a major complaint by voters of the Bush Administration and the Republican-held Congress. High gas prices would help the Democrats win seats in November. Lower gas prices would help Republicans keep control. And, lower seems to be the trend from now until November, unless something unforeseen happens.

Even with the lowering prices now at the pump and a major new find of oil and natural gas in the Gulf of Mexico by Chevron and partners (said by them to be as large as the North Slope of Alaska), the fundamentals leading to ever-higher natural gas, oil and gasoline prices remain in place. China is still growing as is India. And, the true nature of remaining oil supplies is still unknown. There could be much less in known reserves in some nations than once thought. (Iran has already admitted that it won’t be a able to meet a future increase in planned production.)

The price of oil has been expected to rise over the coming years along a saw tooth, up and down, peak and valley curve. We’re headed toward a valley at the moment, but there are still hills ahead to climb. It’s just a matter of when we reach them.

For gas price data visit the Energy Information Agency of the US Department of Energy at http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_home_page.html . For the fuel Ethanol Terminal Market Price from the California Energy Commission at http://www.energy.ca.gov/gasoline/graphs/ethanol_18-month.html

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