Gas prices are headed down as vacation season nears

Gasoline prices are poised to fall as Memorial Day approaches, a welcome change for motorists who have gotten used to increases cutting into their summer vacation money.

Experts who had been predicting a national average of more than $3 per gallon by Memorial Day now say prices have likely peaked just beneath that. Rising supplies and concerns about the global economy have helped send wholesale gasoline prices plummeting by 22 cents a gallon since last week.

"Gasoline supplies are about as good as they've ever been going into the summer driving season," said oil analyst Phil Flynn of PFGBest in Chicago.

From their peaks May 3, oil prices have declined 13 percent, to $75.65 a barrel. In that time, wholesale gasoline prices have declined 9 percent, to $2.21 a gallon.

The decline is starting to filter down to motorists, but the full effects will take several weeks to be reflected in pump prices, which average $2.90 nationwide and $2.81 in Fort Worth-Arlington.

Although prices are substantially higher than a year ago, by summer the national average could be below last summer's peak of around $2.70 a gallon, said Tom Kloza of Oil Price Information Service. Either price, however, is way below July 2008, when the retail price of regular unleaded peaked at $4.11.

Economists say the coming drop in energy costs will not significantly affect overall consumer spending or economic growth. But motorists will feel better having a little more money to save or to spend on clothes, dinner or a vacation.

Just a few months ago, analysts were forecasting a nationwide retail average well above $3 a gallon. So what changed?

The European debt crisis escalated. This undermined confidence in the strength of the global economic recovery and led analysts to lower their energy demand forecasts. The crisis also sent institutional investors flocking to the dollar, a relatively safe haven. And these days, when the dollar goes up, the price of oil goes down.

Gasoline supplies have risen steadily. As of Friday, the U.S. had 222 million barrels of gasoline in storage, about 5 percent more than a year ago. Refinery output has been growing faster than demand.

Political unrest in oil-producing nations has been muted. This is a wild card that could change quickly. But lately, violence in Nigeria and tensions in the Middle East have been relatively minor, traders say.

The massive oil spill in the Gulf of Mexico has not affected fuel prices because it has had minimal effect on petroleum production, analysts say.

Predictions of $3-a-gallon gas have come true in 10 states, including California, Hawaii, Illinois, New York and Nevada. Distance from the nation's refining hub along the Gulf Coast or high taxes are contributing factors.

If pump prices fall by 22 cents per gallon -- in line with the decline at the wholesale level -- that will knock about $11 off the fuel bill of a typical motorist burning 50 gallons a month.

Ken Mayland of ClearView Economics suspects that most drivers will view the lower prices as temporary and that they'll pocket the savings.

The federal government's Energy Information Administration has been forecasting a nationwide average of $3 a gallon for at least part of the driving season. It's not ready to concede that gasoline prices have reached a peak.

Tancred Lidderdale at the agency said a resolution to the debt crisis in Europe, a decline in the dollar and fresh signs of global economic growth could send oil prices back up.

"The market is volatile," he said.