Forecast: Gas Prices Set to Fall

After watching those price numbers march upward for months on the gas station displays, here's some good news: Analysts now predict a 50-cent-per gallon drop by summer.

News this week that U.S. gasoline demand had continued to drop and that oil supplies grew buttressed the argument that normal seasonal trends will lead to summer price relief. As MoneyWatch Editor at Large Jill Schlesinger has been predicting, oil has remained at below $100 a barrel after a 15% drop.

After a 91-cent per gallon rise since January, the national average price for regular has faltered just short of $4 -- a;though individual states averages have been north of $4 for some time. But a return to gas at $3.50 per gallon on average could change the buying psychology of car shoppers and perhaps temper the raging demand for hybrids and other high-mileage cars.

Analysts like Tom Kloza of the Oil Price Information Service, who is among those foreseeing $3.50 gas, do caution that any falloff will be uneven. Kloza cites these regional variations:

  • Pump prices are falling in Western states, although they are only down to $4.24 in California -- a state that always has among the highest gas prices.
  • Prices have risen temporarily again in the Midwest and Southeast because Mississippi River flooding makes it hard for refineries clustered along the river to ship out gasoline to their wholesale customers. But this bottleneck should end as the flooding abates.
  • Gas station owners, who felt squeezed by extremely swift wholesale price hikes early this year, may resist dropping prices until forced by their competitors.
With those caveats, analysts expect the reduced demand and the traditional summer drop-off after a springtime rise will bring the national average down close to $3.50.

That price change, say the analysts at Kelley Blue Book, could lessen the now-pervasive effect of gas prices on car shoppers' choice of vehicle. In the most recent survey of shoppers on its kbb.com website, Kelley found that 84% of respondents said that gas prices affected their choices. But using methodology that predicts consumer reaction to different levels of gas prices, the Kelley forecasters believe that number would drop to under 50% at $3.50 a gallon. "If gas prices were to rapidly dip back down to $3.50, we would expect people to be less influenced by the price of gas when they are shopping for their next vehicle," says an analysis from the Kelley market intelligence department.

Here is what the likely gas price decline might mean for car prices and driving habits:

New Cars
The combination of swiftly rising gas prices and supply disruptions after the Japanese earthquake and tsunami has sent transaction prices soaring for cars with high gas mileage. (See Automakers Scramble in the Wake of Japanese Disasters.) Prices have risen for high-mileage cars made in Japan, like the hybrid Toyota Prius (at left) and the subcompact Honda Fit, thanks to both supply limitations and a demand surge created by high gas prices.

A drop to $3.50 a gallon "could cause values for fuel-efficient vehicles such as the Prius to decline slightly, perhaps 1% to 2% a month," says Alec Gutierrez, manager of vehicle valuations for Kelley Blue Book. But he predicts we won't see sizable price declines for high-MPG cars till the supply disruptions come to an end -- perhaps by fall.

Toyota said this week that its situation with Japan-based parts suppliers already is improving. If you have been itching to trade up for a higher-mileage car, maybe $3.50 gas will help you be patient and avoid overpaying.

Used Cars
The same combination of high gas prices and Japan-related supply limitations has pushed up prices for high-MPG used cars as well. Prices for used models of Prius have rocketed up 38% since the start of the year, and prices for other high-mpg cars have risen as well. (See Used Car Prices Surging.) A gas price drop to $3.50 could at least ease the upward pressure on these prices, and perhaps result in small decreases as well.

Among used cars, only very large SUVs like the Ford Expedition have dropped in value. If you need a large hauler like that, buy it now; at least $3.50 gas will make it a little easier to bear the price of filling up. (See Which Cars Face a $100 Fill-up?)
Driving Habits
We've heard reports of falling gasoline demand for seven consecutive weeks now -- but the driving decline did not begin until gas had crossed above $3.50. Getting back to that level could slow or reverse the trend, making drivers less willing inconvenience themselves with alternative commutes or reduced errand trips. If that happens, the demand increase could slow any decline in prices -- even if oil stays below $100 per barrel.

A Caveat
As with all economic forecasts, a drop in gas prices could be easily derailed by new Mideast chaos or other world events. But how should you react if gas does drop to $3.50? If you have been consolidating your trips for errands, driving more slowly or less aggressively to save gas, why not keep it up?

Filling up your car will still be costly. And you certainly have better uses for any money you save.

Photo courtesy of Toyota
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