How will the war with Iraq affect fuel prices at home?

The war in Iraq, for the most part, is over. As U.S. soldiers attempt to restore a sense of normalcy in Iraqi cities and in the countryside, many contractors and motorists are wondering if and when rising gasoline prices will return to normal.

Although the situation in the Middle East is still quite fluid, there are signs the war might not lead to permanently inflated fuel prices, according to Michael Martin, senior economist for the American Road and Transportation Builders Association. In a recent web conference held by ARTBA, Martin noted there are many factors, both foreign and domestic, that influence the price of gasoline at the pump. Even in times of peace and economic stability, factors such as the price of crude oil, changing domestic inventories of crude oil and gasoline, seasonal changes in demand and disruptions of refinery operations or pipelines can cause gasoline prices to rise as much as 8 cents a gallon in a week’s time and average weekly changes (since January 1, 2001) have been 2.3 cents per gallon.

Specific factors caused pre-war price spikes
But in early March of this year, as war with Iraq loomed, the Lundberg Survey, which conducts a monthly survey of gasoline prices at 8,000 stations around the country, reported the average price of a gallon of gas in the United States had reached $1.75 a gallon. Many consumers blamed this price increase on the situation in Iraq and worried a war there would drive fuel prices even higher. Some alarmists predicted prices of $2.50 a gallon by the time a war in Iraq ended.

Fortunately, those pundits appear to have been wrong. “Recent gasoline price hikes have been the result of a combination of rather specific and unique factors,” Martin explains. “There have been significant recent disruptions in oil supplies such as general strikes in Venezuela and unrest in Nigeria. And, of course, speculation about the impact of an Iraqi war.”

Martin says these factors naturally drove crude oil prices higher. But oil companies further contributed to cost increases by implementing cost containment practices. “As crude oil prices rose, oil companies became more reluctant to purchase barrels at inflated prices, waiting instead to see if prices would drop when the international unrest subsided.” Unfortunately, Martin notes, putting a moratorium on crude oil purchases caused domestic crude stocks to drop, which caused further price hikes at the pump.

As international situation stabilizes, look for price decreases
Martin prepared two possible scenarios regarding the war with Iraq — a best-case and worst-case sequence of events and how they would affect gasoline prices.

As of now, it appears Martin’s best-case scenario is coming to pass. In this model, he looks for:
· A short war with Iraq
· Minimal damage to Iraqi and other oil fields in the region
· No international backlash from the war
· No major terrorist attacks
· No OPEC oil or trade embargo
· No disruption of oil production or delivery
· Unrest in Venezuela and Nigeria contained
· No pipeline or refinery breakdown
· Positive market perceptions (consumer confidence rises)

If this scenario holds true, Martin says American contractors and consumers can confidently expect crude oil prices to fall $20 to $25 per barrel, eventually returning to pre-conflict levels in 3 to 5 weeks after the end of the war.

This would be the case for gasoline prices at the pump as well. Martin says given the current conditions in Iraq, he is looking for pump decline (from the national average of $1.75 per gallon) to between $1.50 and $1.60 per gallon, eventually returning to pre-war prices 8 to 10 weeks after the end of hostilities.

If the positive trends noted by Martin continue, it’s good bet that American consumers will see notably cheaper gasoline prices by the beginning of summer.