Valley residents get break as gasoline prices plunge

BROWNSVILLE - The price of oil has plunged to eight-month lows recently as the financial crisis widens on fears of a global slowdown.

The price of a gallon of gasoline has dropped as well, though not as precipitously as has crude.

The question around the pump is how much farther we can expect gas to drop.

"If I knew that I wouldn't be sitting here talking to you," said Michelle Foss, chief energy economist at the Jackson School of Geo Sciences at the University of Texas at Austin.

Shortly after gas topped $4 per gallon, domestic consumption began to decline. The tumble on Wall Street and ensuing reverberations around the globe has accelerated the decreasing oil prices.

"(In the short term,) we should see prices continue to erode throughout the year," Foss continued. "If the world falls apart, demand for major consumption falls apart too."

Still, where the price of crude has tumbled nearly 40 percent from its peak of $147 earlier this year, consumers in many states are still paying more than $3.50 at the pump.

That's because even as the price of crude has consistently dropped, the price of gasoline has lagged behind.

"It's called the rocket and the feather," explained Mark Cooper, director of research for the Consumer Federation of America. Oil companies are quick to pass on the increased price of crude and slow to pass on price declines.

The three principal price factors that determine what we pay for gasoline are crude, refiners and taxes.

When the price of crude rockets, as it did earlier this year, and production costs remain the same, oil companies make a lot of money.

Conversely, when the price of crude goes down oil companies receive increased profits from domestic spread, a term that subtracts taxes and crude prices per gallon to figure profit at the pump.

Typically, the lower the cost of crude, the higher the domestic spread.

"Oil companies have the power to set the wholesale price to protect their profits," Cooper said. "You get away with as much you think you can."

The largest companies are integrated and make money when the price of crude is high or at the pump when the crude drops.

Although declining gasoline prices are largely the result of declining demand, politics haven't helped matters. Last week's $700 billion bailout of Wall Street was expected to calm fears of a recession.

So far, that has not happened.

If demand wanes as expected, the price at the pump will continue to decline in the short term. Exactly how far it drops is anybody's guess, Foss said.

"That's what everybody wants to know," Foss said.