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Oil Prices Plummet In Uncertain Market

Originally published on August 10, 2011 11:27 am

Oil prices are falling, as traders dial back their expectation for the global demand for oil. But drivers are still waiting for the price of gasoline to drop as well.

The price of oil closed on Tuesday at about $79 a barrel — the lowest since last September.

Crude oil prices were on the rise at the beginning of the year. Unrest in the Middle East put pressure on supplies, and traders had a more optimistic outlook about the demand for oil, explains Richard Soultanian, an oil industry analyst with NUS Consulting Group.

"If the economy's going to grow and there's lots of money around, that means people are going to use more of everything — more copper, more silver, more oil, more gasoline. So [traders] started to bid the price of all that up," Soultanian says.

Those initial forecasts for growing economic activity eventually fell apart. The price of crude started to dip in late spring, but it plummeted in recent days. According to Soultanian, slower-than-expected growth in the U.S. economy and an unstable stock market after the degrading of the federal government's credit rating have been a stark reality check for oil traders.

"The economy is much weaker than people expected," Soultanian says. "The global markets are very concerned about the possibility of another financial crisis."

Impact At The Pump

Still, falling oil prices have not yet translated to cheaper gasoline prices at the pump.

For Miss Harris, a resident of Washington, D.C., high prices at the pump have meant filling up her new car with a lower grade of gasoline.

"I switched over last week because the price of premium is kind of high, so I just decided to go down to a lower grade to save a few dollars," Harris says.

Drivers like Harris have not seen a dramatic drop yet in gas prices because the price of crude oil is just one factor in what determines the numbers at the pump, says Sarah Ladislaw, an energy analyst at the Center for Strategic and International Studies.

"Crude oil prices make up about two-thirds of the price that you see of a gallon of gasoline," Ladislaw explains. "And the other third of that is made up by refining costs, distributing, marketing and then taxes."

That other third also depends on where you buy your gas. For example, the closer to an oil refinery, the cheaper the transportation costs and the cheaper the price.

'Up Like A Rocket, Down Like A Feather'

John Hofmeister, a former president of Shell Oil Co., says there's an easy way to understand how gasoline pricing works: "Up like a rocket, down like a feather."

Gasoline prices generally take longer to fall because local gas station owners often hedge their bets and keep their prices high even if the gas they're buying is cheaper.

"[Gas stations] are trying to make a little money as the crude oil price drops, because they haven't made much money as the crude oil price has risen," Hofmeister explains.

That extra profit can be an important cushion for gas station owners, says Hofmeister.

But for consumers, it means more pain at the gas pump.

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STEVE INSKEEP, Host:

Amid all the market turmoil, the price of crude oil has fallen to levels not seen since last September. Yesterday, oil closed at just over $79 per barrel. But, and we know this will shock you, as NPR's Hansi Lo Wang reports, prices at the gasoline pump are not falling as quickly.

HANSI LO WANG: Richard Soultanian says there are two main reasons why oil prices are falling.

RICHARD SOULTANIAN: One, the economy is much weaker than people expected. And two, the global markets are very concerned about the possibility of another financial crisis.

LO WANG: Soultanian, an oil industry analyst with NUS Consulting Group, says in the beginning of the year, crude oil prices were on the rise. Unrest in the Middle East put pressure on oil supplies and traders had a more optimistic outlook about the demand for oil.

SOULTANIAN: If the economy's going to grow and there's lots of money around, that means people are going to use more of everything, more copper, more silver, more oil, more gasoline - so they start to bid the price of all that up. And I think what we've seen in the last few weeks, is that all of those forecasts for a growing GDP, growing economic activity - all of those has start to fall apart.

LO WANG: The price of crude started to dip in late spring. But in recent days, it's plummeted. That's because traders have dialed back their expectations for the global demand for oil.

Soultanian says slower-than-expected growth in the U.S. economy and an unstable stock market after the degrading of the federal government's credit rating, have been a stark reality check for traders. And have pushed oil prices to fall, but not necessarily gasoline prices.

At a gas station in Washington, D.C., a gallon of regular cost $3.79 - about ten cents above the national average. Miss Harris lives in D.C. And she says high prices at the pump has meant filling up her new car with a lower grade of gasoline.

HARRIS: I switched over last week because the price of premium is kind of high. So I just decided to go down to a lower grade to save a few dollars.

LO WANG: Drivers like Harris haven't seen a dramatic drop, yet, in gas prices, says Sarah Ladislaw. She's an energy analyst at the Center for Strategic and International Studies. And she says that's because the price of crude oil is just one factor in what determines the numbers at the pump.

SARAH LADISLAW: Crude oil prices make up about two-thirds of the price that you see of a gallon of gasoline, and the other, you know, third of that is made up by refining costs, things like distributing, marketing, and then taxes.

LO WANG: That other third also depends on where you buy your gas. For example, the closer to an oil refinery, the cheaper the transportation costs and the cheaper the price.

John Hofmeister, a former president of Shell Oil Company, says there's an easy way to understand how gasoline pricing works.

JOHN HOFMEISTER: Up like a rocket, down like a feather.

LO WANG: Hofmeister says it generally takes longer for gasoline prices to fall because local gas station owners often hedge their bets and keep their prices high, even if the gas they're buying is cheaper.

HOFMEISTER: People are trying to make a little money as the crude oil price drops, because they haven't made much money as the crude oil price has risen.

LO WANG: Hofmeister says that extra profit can be an important cushion for gas station owners. But for consumers, it means more pain at the gas pump.

Hansi Lo Wang, NPR News.

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INSKEEP: This is NPR News. Transcript provided by NPR, Copyright NPR.