Fuel costs expected to stabilize

Consumers can expect the fuel market's newfound sanity to stick around for a while, according to energy analysts.

Experts roundly say oil and gasoline prices in 2009 will avoid their volatile swings of 2008. Analysts expect oil, which makes up about half of a gallon of gasoline, to stay below $75 a barrel for the next 12 months. The July record was nearly $150, and the price break means gasoline should remain under $2.50 or $3 a gallon through 2009. And unlike in recent years, energy analysts don't expect the coming year's price points to shatter the prior year's records.

Credit the lower fuel costs to the poor economy. Rising unemployment forces commuters off the road, and tighter budgets leave consumers with less money for traveling. The upshot: dwindling demand for gasoline and the crude that oil refiners use to make it.

For the first time in more than half a decade, economic conditions have supplanted geopolitical strife and the Gulf Coast hurricane season as the biggest factors that analysts say will affect fuel costs. And that's saying something, given the fresh outbreak of hostilities between Palestinian group Hamas and Israel.

"We can look to this geopolitical stuff or the weather, which can both drive the price of a barrel of oil, but at the end of the day, the question is whether the demand for oil is going to be there," said Phil Flynn, a vice president and energy analyst with Alaron Trading Corp. in Chicago.

Agreed Rick Mueller, director of oil markets for Massachusetts research firm Energy Security Analysis: "Geopolitical and weather issues are certainly important, and in a normal year, they would be at the top of the list. But it's been such a horrible year for the economy, and there's been an unprecedented decline in oil demand, so the economy has really stepped forward as the No. 1 issue."

Sluggish demand for petroleum has widened global crude surpluses and eased supply concerns that egged on prices in 2008, Mueller said. Among the Organization of Petroleum Exporting Countries, the spare capacity of unused crude has jumped from 1 million to 2 million barrels daily a year ago to about 5 million barrels a day now. That bigger margin should help international economies weather any supply disruptions, so traders no longer bid up oil prices by betting on potential price spikes.

Michael Geeser, a local spokesman for travel club AAA, said his company expects continued slow demand for fuel in 2009. Numbers from data service MasterCard Advisors showed that gasoline demand fell 3.5 percent in the week that ended Friday compared with the same week a year ago. And the federal Energy Information Administration projects more demand loss in 2009. Even as lower gasoline prices allow more consumers to hit the road for fun, the increase won't be enough to reverse 2008's demand slide, Geeser said.

Several analysts said they're also watching OPEC's moves to peg where energy prices will go. Trading markets shrugged off OPEC's threat of production cuts in late 2008, partly because economic woes outweighed concerns about lower supplies, and partly because OPEC's nations haven't always fallen in line behind output caps.

With oil prices falling to roughly a third of their 2008 highs, OPEC members might see more incentive to stick together on production controls, said Denton Cinquegrana, West Coast markets editor at Oil Price Information Service in New Jersey. Whether discipline reigns within OPEC will help determine prices in the spring and summer, he said.

For now, energy experts aren't predicting big gains in oil and gasoline prices in 2009. Crude has enjoyed something of a rally, rising from $33.87 a barrel on Dec. 19 to $48.54 Tuesday. But Flynn attributed the rising price to vague hopes for economic improvement in the new year. If the economy doesn't live up to higher expectations by delivering some improved indicators in coming weeks, the current price surge could evaporate, he said.

Nor will today's prices cancel out historical peaks and valleys. Consumers can still expect gasoline and crude prices to rise in late spring, as summer-vacation season gets under way. The mid-summer price plateau, the post-Labor Day falloff and the late fall bump as refineries switch fuel blends should also all materialize in 2009, though experts say those ups and downs will be less pronounced in 2009 than they were in 2008. The best chance for a rally could come in late 2009, as stimulus packages reach the economy, Flynn said.

Oil could trade at anywhere from $25 to $75 a barrel, Flynn said. Gasoline prices could approach $3 a gallon at their apex, but they'll more likely hover at around $2 a gallon. If the economy worsens, prices at the pump could even drop to around $1 a gallon, Flynn said.

Mueller said oil should average about $50 a barrel in 2009, unless indications emerge that China or other growing economies will experience sharper downturns. If that happens, expect crude prices to drop to around $40 a barrel.

Cinquegrana said oil prices could range from today's price to as much as $70 by year's end, with gasoline averaging $2.25 to $2.50 a gallon.

The Energy Information Administration forecasts an average price per barrel of $60 through 2009.

Beyond 2009, some analysts say pricey oil could make a comeback. Low crude prices discourage production and expensive exploration ventures, so oil supplies could fall noticeably in coming years.

Some observers say oil could eventually eclipse $150 a barrel, maybe even on its way to $200. In such a scenario, gasoline would easily cost more than the record nationwide high of $4.11 a gallon set in the summer.

No one knows for sure, but some analysts say the spike could happen as soon as 2010, or perhaps in 2011 or 2012.

"I think those supply limits will come back to bite with a vengeance," said Sean Brodrick, a natural resources analyst at Weiss Research.

Flynn said he believes it will take "many years" to return to July's $147.27-per-barrel record. One of the factors that pushed up oil prices in recent years was cheap, easy credit, and that has disappeared for the foreseeable future.

"We don't have the capacity to drive oil up to $100 a barrel again," Flynn said.

The Energy Information Administration predicts a rise in 2030 to about $130 a barrel in 2007 dollars.

Economists offered mixed views on whether lower energy costs will revive the nation's economy.

Flynn said he believes the economy would be in even worse shape if fuel prices hadn't fallen. And low energy prices could make it easier for businesses and consumers to survive the next few months.

But Cinquegrana said he's not sure lower prices will make a big difference, what with rising unemployment, increasing home foreclosures and falling retail sales.

"Lower gasoline prices are really just a drop in the bucket," Cinquegrana said. "The negatives in the economy right now are far outweighing lower (oil and fuel) prices."

Contact reporter Jennifer Robison at jrobison@reviewjournal.com or 702-380-4512.

The Associated Press contributed to this report.