Iraqi Deal Good, but Not Dramatic, News for Drivers

The United Nations agreement to allow Iraq to begin its first oil exports in six years should hasten the decline of gasoline prices in California, but there won’t be a steep plunge at the pumps, analysts said Monday.

Prices throughout the oil marketing system had already begun to fall for reasons unrelated to Iraq, and the addition of Iraqi oil to the pool will improve supplies worldwide, analysts said.

But prices seldom fall as fast or as far as they rise, and there will be a considerable lag between the drop in crude oil prices and those at the pump--a phenomenon already visible in California’s wholesale and retail markets.

In California, the average price of regular gasoline has fallen about 2 cents, to $1.526 on Monday, from a peak of $1.545 on May 6, the Energy Information Administration reported.

But average statewide wholesale prices have fallen a sharp 19.34 cents a gallon for regular unleaded gasoline from the peak on April 30, the California Energy Commission reported.

The lag time between the drop of wholesale gasoline prices and those at the pump can be attributed in part to strong demand for gasoline as the spring and summer driving season heats up.

At the same time, retailers may seek to recoup some of the profits lost when wholesale prices were shooting up.

For their part, retailers say that prices for the majority of wholesale gasoline sold in the state--gasoline delivered to dealers--have not dropped as much as spot or terminal prices, leaving them unable to lower pump prices.

“If [prices to dealers] have fallen, it’s by less than a cent,” said Jan Speelman, executive director of the Automotive Trade Organizations of California, which represents dealers statewide.

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Still, the Iraqi agreement is good news for motorists who have seen gasoline prices surge in the last three months, particularly in California. The increase was partly blamed on world refiners letting inventories fall in anticipation of an agreement with Iraq.

“This is yet another positive development in the downward pressure on prices in California,” said Charles Imbrecht, chairman of the California Energy Commission.

The agreement between Iraq and the United Nations will allow Iraq to sell $1 billion of oil every 90 days for an initial 180-day period, or between 600,000 and 700,000 barrels of oil a day at current prices, less than 1% of total world oil production.

That amount could increase if prices fall as Iraq tries to earn that $1 billion. Iraq isn’t expected to begin actual exports for several weeks.

“A couple of months down the road, we think [crude oil] prices will be off about $2 a barrel from what they would be otherwise” as Iraq’s exports hit world markets, said James Placke, director for Middle East research at Cambridge Energy Research Associates.

“They’ll reach that point over a series of jerky adjustments, and Iraq will have to use sharp elbows to make space for themselves in the market,” he added.

Perversely, futures prices for crude oil jumped sharply Monday following news of the agreement. That’s because oil prices had already fallen last week in anticipation of the agreement, and Monday’s trading was a correction, analysts said.

Light, sweet crude for June delivery closed up $1.84 per barrel at $22.48 per barrel in trading on the New York Mercantile Exchange, the strongest one-day surge in three months. But the rally won’t last, analysts said.

“Iraq has to have a positive effect on the market in terms of lowering prices because it’s more oil than we had before,” said John H. Lichtblau, chairman of the Petroleum Industry Research Foundation in New York.

The degree to which world oil prices decline will depend in part on whether the Organization of Petroleum Exporting Countries, of which Iraq is a member, can agree to lower export quotas of its other members when the cartel meets in Vienna on June 5. Analysts doubt that will happen.

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Falling, but Not at the Pump

Wholesale price for regular unleaded gasoline in California have dropped 15 cents a gallon since May 6, but average retail prices are down less than 2 cents. Cents per gallon:

Retail

Monday: 152.6 cents

Wholesale

Friday*: 84.5 cents

* Wholesale price data delayed by one day.

Source: California Energy Commission. Energy Information Administration