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Gas Prices Spur Drivers to Cut Use to Five-Year Low

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Gas Prices Spur Drivers to Cut Use to Five-Year Low

Supply Not an Issue, 
But Other Demand 
Keeps Oil Price High
July 10, 2008

As average gas prices hit a record high of $4.108 a gallon this week, the government released new data showing that drivers have cut back their use of the fuel to levels not seen in five years.

Associated Press
House Speaker Nancy Pelosi discusses how Congress is helping provide relief for high gas prices at a news conference in front of a Shell gas station in San Francisco.

The average price of gasoline in the U.S. has been above $4 a regular gallon for more than a month, AAA reports, putting a dent in gasoline demand.

Even through the Fourth of July weekend — a time when Americans traditionally get on the road — gasoline consumption dropped 3.3% from last year to 9.347 million barrels a day, according to weekly data released by the federal Energy Information Administration. For the first week of July, that is the least drivers have used since 2003, when consumption was 9.05 million barrels a day.

Meanwhile, supplies of gasoline are building even as refiners produce fewer gallons of the fuel. Stocks of gasoline grew by almost one million barrels from the previous week, well above levels last year. Which means there will be plenty of gas available this summer, experts say. “There is no doubt there are no supply concerns for the next two months,” says Stephen Schork, president of the oil-and-gas-research firm Schork Group.

The weaker demand, combined with plentiful gasoline supplies, could eventually lead to lower prices at the pump. The price for gasoline for August delivery inched up 0.5% to close at $3.3808 a gallon on the New York Mercantile Exchange, while oil-futures prices closed one cent higher at $136.05 a barrel.

Still, drivers could be paying today’s prices or even higher ones in coming months if there isn’t a major pullback in oil prices, Mr. Schork warns.

The run-up in oil prices has pushed up gasoline prices by more than 30% since the beginning of the year. At first, consumers cut back only a little on their gas purchases, but as the year progressed and prices got higher, the size of the cutbacks grew.

In April, gasoline demand was down on average less than 1% from the same month last year; by June, consumption had fallen an average 2.2% from the previous year, according to the federal data.

[oil market]

This has made for one of the weakest summer driving seasons in years. A survey commissioned by Discover Financial Services found that 62% of respondents are changing their holiday plans because of the higher gas prices, while 15% canceled vacations.

However, declining gasoline consumption in the U.S. has done little to deflate gasoline prices at the pump so far. The problem is that demand for other fuels, namely diesel, continues to be strong. This is helping to keep oil prices high.

In the U.S., demand for diesel and similar fuels is up almost 6% from last year. Elsewhere in the world, especially in developing countries such as China, the growth of diesel demand is stronger.

“Diesel is going to remain the fuel of choice in transportation,” says Francisco Blanch, head of global commodity research at Merrill Lynch & Co. “We still see strong demand for air travel, for trucking and for trains.”

Diesel prices have climbed more than gasoline, gaining 65% to a national average of $4.81 a gallon in the past year, compared with a 38% rise in gasoline.

Eventually, analysts expect higher fuel prices to erode demand in emerging economies, as well. There are signs that this is starting to happen as governments reduce the subsidies that had kept fuels inexpensive. But it could take time before oil prices reflect this.

“We think oil is set for a significant correction,” says Michael Waldron, an energy research analyst at Lehman Brothers. “But it’s probably not going to occur until the end of this year or the beginning of next year.”

Write to Ana Campoy at [email protected]

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