Gas prices to fall 50 cents by summer?

Drivers will get some good news in the weeks ahead as they pull into their filling stations.  The summer drive will get significantly less expensive, according to the Washington Post, as gas prices may fall as much as 50 cents a gallon:

Some relief from suffocating gas prices will likely arrive just in time for summer vacation. Expect a drop of nearly 50 cents as early as June, analysts say.

After rocketing up 91 cents since January, including 44 straight days of increases, the national average this past week stopped just shy of $4 a gallon and has retreated to under $3.98. A steady decline is expected to follow.

It might not be enough to evoke cheers from people who recall gas stations charging less than $3 a gallon last year. But it would still ease the burden on drivers. And it might help lift consumer spending, which powers about 70 percent of the economy. A 50-cent drop in prices would save U.S. drivers about $189 million a day.

Why the drop?  Summer usually brings some price relief, but not to this extent.  The stabilizing situation in oil producing nations (except Libya) has to be helping with the markets.  The end of Osama bin Laden may be factoring in as well, but if traders are thinking that the war is over because of it, they’re fooling themselves.  (Speaking of which, price drops for that reason would come from the same speculators that this administration was demonizing last month, wouldn’t they?)  The sale of leases in Iraq may be providing much of the longer-term view as the new, democratically elected government attempts to ramp up to Saudi output levels.

At the beginning of the year, the US average for regular gasoline was $3.015 per gallon.  Today, it’s actually 97 cents higher.  A drop of 50 cents per gallon — assuming we get that much of a decline — will help, but it’s still going to leave fuel prices nearly 16% higher this year alone, far beyond the rate of inflation.  Food prices will come down a little, but they will remain elevated, and since wages aren’t growing, consumers will still feel the pinch.

We need much higher production levels to bring prices down on a long-term basis.  Until we get that, we will remain vulnerable to price shocks based on political instability in oil-producing regimes.

And speaking of price shocks, the partial retreat of gas prices has given some Democrats a great idea:

Linking two of the politically volatile issues of the moment, Senate Democrats say they will move forward this week with a plan that would eliminate tax breaks for big oil companies and divert the savings to offset the deficit. …

President Obama and some top Congressional Democrats have said they want to take some of an estimated $21 billion in savings from ending the tax breaks and steer it toclean energy projects. But the Senate’s Democratic leadership is calculating that using it to cut the deficit instead makes it a tougher issue politically for Republicans who are trying to burnish their conservative fiscal credentials.

“Big Oil certainly doesn’t need the collective money of taxpayers in this country,” said Senator Robert Menendez, Democrat of New Jersey, one of the authors of the legislation that Democrats intend to showcase. “This is as good a time as any in terms of pain at the pump and in revenues needed for deficit reduction.”

What a wonderful notion!  Except, of course, that corporations and businesses don’t actually pay taxes.  Those costs get passed onto consumers, or onto employees in the form of layoffs and reduced compensation. That’s true of every tax paid by businesses.  The only impact this will have will be to raise prices at the pump so that drivers cough up additional billions, rather than the government getting serious about deficit and debt reduction by cutting its own spending.

The “Big Oil” tax breaks we’re discussing represent exactly 1.3% of this year’s deficit, by the way, and they’re not coming from government spending (in other words, actual subsidies) but a perceived lack of tax revenue, a figure derived through static tax analysis.  Ending these tax breaks — most of which are open to all businesses, and not just oil companies — will not provide a $21 billion windfall because oil companies will simply change their investment behavior to avoid paying the taxes.  That will force prices up even further as production drops, giving us a replay of the Carter administration’s energy policies and their outcomes.