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Lower prices at the pump, but for how much longer?

October 13, 2009 |  4:58 pm

Gasoline prices were down this week, but behind the scenes some economists are worried that a spike in the price of crude oil could slow the recovery.

Average pump prices in California fell for the fourth straight week, according to the Energy Department's weekly survey of filling stations. But with oil futures inching toward $75 a barrel, analysts said the retail gasoline declines may be very short-lived.

Oil futures have bounced between $65 and $75 a barrel for several months, but now it looks as though prices may soon go higher.

That would be bad news for the economy, pushing up the price of gasoline and other products at a time when consumer confidence remains weak and U.S. businesses are continuing to cut jobs, said Edward E. Leamer, director of the UCLA Anderson Forecast.

"It would be like a tax increase, more money out of the wallets and purses of American consumers, and that would tend to stunt any recovery," he said.

The average price of a gallon of regular gasoline in California fell 5.4 cents over the last week to $3.015, the Energy Department said. Motorists who were willing to shop around today could find it for as low as $2.79 a gallon at various stations in Los Angeles, Orange and Ventura counties, according to www.gasbuddy.com, a system of websites throughout the nation where volunteers report the highest and lowest prices they see.

Nationally, pump prices were already rising by an average of 2.1 cents a gallon to $2.489. Analysts and economists blamed oil markets, which they said could spike to anywhere between $80 a barrel to more than $100 a barrel in the coming days and weeks. On Tuesday, crude oil futures for November delivery rose 88 cents, or 1.2%, to $74.15 a barrel, on the New York Mercantile Exchange.

"It could go to $92 a barrel to $102 a barrel pretty easily if it crosses $75 a barrel in trading this week," said Sean Brodrick, a natural resources analyst for the investment newsletter uncommonwisdomdaily.com.

Brodrick cited several reasons for a potential spike in oil prices. He said investors were fleeing the weak U.S. dollar and pouring their money into gold, oil, silver and other commodities they think are better investment bets. Burgeoning new-car sales in China are also driving prices as first-time buyers purchase fuel for their vehicles.

And although there have been new discoveries of oil, Brodrick said, "it tends to be in very expensive places where it is difficult to find and difficult to get to," such as BP's find of a potential billion-barrel field that's thousands of feet below one of the deepest parts of the Gulf of Mexico.

John Kilduff, senior vice president of energy for MF Global, says oil traders have been willing to shrug off weak economic indicators in the U.S. in favor of international evidence of a recovery from the global recession.

"With the dollar still cratering, it looks like there could be support for oil at $80 a barrel to $85 a barrel," Kilduff said.

The increases could come in spite of a plentiful supply. Phil Flynn, energy analyst for PFG Best in Chicago, said the normal rules of supply and demand do not apply in such a volatile atmosphere. 

For consumers, that means higher prices at a time when many are still cutting back. U.S. businesses, meanwhile, are still cutting workers and aren't likely to start hiring again if cash-strapped consumers reduce spending even further to cope with high prices at the pump.

"You can’t have sustained economic growth without employment growth,” said UCLA's Leamer. Adding a spike in oil into the mix “adds to the uncertainty. People tend to postpone purchases, and it's home purchases and auto buying that is needed to power the economy going forward,” he said.

-- Ronald D. White

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