Released on September 20, 2006
(Next Release on September 27, 2006)

How Low Can It Go?
From a 2006 peak of $3.04 on August 7, 2006, EIA's weekly U.S. average retail price for regular gasoline has fallen by 54 cents per gallon in just 6 weeks, including a 12-cent decline in the past week. This is already the second-largest uninterrupted decline in the history of the survey (dating back to August 1990), trailing only last year's 9-week, 78-cent drop after Hurricane Rita. Some analysts have predicted that average U.S. prices will drop near $2 per gallon or lower, and prices under $2 have already been reported in a few locations. Not surprisingly, one of the most frequent questions posed to EIA staff recently has been "How low will gasoline prices go?"

In order to understand where retail gasoline prices might be headed, we need to look at the various components behind the price consumers see at the pump. First, and most visible, is the price of crude oil, which has also fallen sharply (over $13 per barrel, or about 31 cents per gallon) over the same recent period. Secondly, the so-called "crack spread" between crude oil and spot market (approximately "refinery gate") prices for gasoline, which typically drops at the end of the driving season, has fallen more sharply than usual since early August. Finally, distribution and marketing costs and profits, along with taxes, round out the major components of retail gasoline prices.

Analysts note that crude oil and gasoline have a "push-pull" relationship: falling crude oil prices can pull gasoline prices down, and falling gasoline prices can push crude oil down as well. (The same forces work in the other direction when prices are rising.) Crude oil prices are fundamentally driven by the global balance between supply and demand, often influenced by geopolitical or natural events. But at the same time, the price of gasoline relative to crude oil is a major factor in the profitability of refining, and the size of that spread helps to determine whether refiners will demand more or less crude oil, influencing its price. Both factors have come into play during the past 6 weeks, as crude oil prices have eased due to a perceived reduction in threats to global supply, and the end of the driving season has magnified the drop in gasoline prices. The latter reflects a decrease in the gasoline crack spread from historically high levels this summer to unusually low levels by mid-September.

Beyond the refinery, taxes add the largest increment (about 46 cents, on average this year) to retail prices, with the remainder attributed to the distribution and marketing functions. The amount available to cover the costs and profits of distribution and marketing varies as prices rise and fall, because of the lag between wholesale and retail price changes, but averages under 20 cents per gallon. In general, marketers tend to make less profit as wholesale prices rise while retail prices lag behind, but make more profit as prices decline.

So what does this breakdown suggest about the near-term prospects for retail gasoline prices? Reductions already seen in spot and futures markets could imply a further decrease in the U.S. average retail price of as much as 25 cents (to around $2.25 per gallon), if those wholesale markets don't turn upward in the interim. To go significantly lower would require a further drop in crude oil prices (currently around $62 per barrel) or the spread between crude oil and gasoline prices (now averaging about 7 cents per gallon). Since the spread between crude oil and gasoline prices is already quite low by historical standards, and the persistence of very low spreads would discourage gasoline production, a further significant drop in crude oil prices would seem to be only practical route to a sustained reduction in retail gasoline prices below the level of about $2.25 per gallon.

Will we ever see a national average retail gasoline price under $2 per gallon again? Though some lucky U.S. motorists can already find prices starting with a "1" again, EIA doesn't see the average price falling below the $2 per gallon level unless crude oil prices continue to decline sharply.

U.S. Average Retail Gasoline Price Drops 12 Cents
The U.S. average retail price for regular gasoline fell 12.1 cents last week to hit 249.7 cents per gallon as of September 18, which is 28.9 cents lower than a year ago. Prices fell for the sixth week in a row, reaching the lowest national average price since March 13, 2006. East Coast prices fell 12.6 cents to 252.8 cents per gallon, while the Midwest saw the largest regional price decrease of 12.9 cents to 231.9 cents per gallon. West Coast prices were still the highest in the nation after falling 10.0 cents to 280.6 cents per gallon, the lowest price in that region since April 10. California prices were 10.1 cents lower at 284.8 cents per gallon, only the second week that the State average has been below the $3 mark since April 24.

Retail diesel fuel prices fell by 14.4 cents to reach 271.3 cents per gallon as of September 18, 1.9 cents lower than last year. This is the fifth week in a row that prices have fallen. Prices were down throughout the country, with the Rocky Mountains seeing the largest regional decrease of 18.4 cents to 305.2 cents per gallon, still the highest regional price in the country. West Coast prices fell 12.3 cents to hit 301.4 cents per gallon.

Propane Continues Robust Build
U.S. inventories of propane continued sharply higher last week, extending the recent robust stockbuild seen since the beginning of the month. Combined with last week's 1.6-million-barrel addition, propane inventories have gained more than 3.5 million barrels so far during September, a level approaching more than 90 percent of the most recent 5-year average stockbuild for this month. Moreover, as of September 15, 2006, U.S. inventories of propane stood at an estimated 67.3 million barrels, more than one million barrels above the same reported week last year. Gulf Coast inventories accounted for most of the weekly build with a stock gain of 1.4 million barrels, followed by a 0.4-million-barrel gain in the Midwest. Gains were also reported in the combined Rocky Mountain/West Coast regions with a modest 0.1-million-barrel increase, while inventories in the East Coast fell 0.4 million barrels during this same time. Propylene non-fuel use inventories edged lower last week by 0.1 million barrels to account for a smaller 4.0 percent of total propane/propylene inventories compared with the prior week's 4.2 percent share.

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