Sharp Drop Fuels Debate Over Gasoline Prices Pump Prices Plunge To Historic Lows Despite Increased Taxes, Tight Supply

Gasoline prices have plunged to their lowest level in decades in inflation-adjusted dollars, leaving analysts somewhat puzzled as to the origin and depth of the decline.

Though gas prices typically drop in the fall - after the summer driving season - this much of a decline is unusual. Analysts attribute the recent price plunge to several factors, including relatively low crude oil prices, fierce competition among gas stations and a sharp drop in the price of MTBE, a key additive in the “oxygenated” fuels now widely used.

“If you could compare these prices in real dollars with those of past years, these prices are probably at historic lows,” said Lawrence Goldstein, president of the industry-supported Petroleum Research Foundation in New York.

When you remove an average of 41 cents in federal, state and local taxes from the most recent price, a gallon of gas now costs less than 70 cents - little more than two 32 cent postage stamps.

“This drop in prices has occurred despite the fact that taxes on gasoline have steadily risen over the last 10 years, including a 15 cent increase in federal and state taxes since 1990,” Goldstein said.

Experts said conservation efforts are not expected to be affected.

“Unless the price goes up or down by a huge amount, people’s driving habits are not going to change,” said John Undeland, a spokesman for the Washington area chapter of the American Automobile Association. “Demand for gasoline is relatively inelastic.”

But the recent price drop “defies the law of gravity,” Undeland said.

“Supplies are at some of their lowest levels in recent memory, which should drive the price up,” he said. “Demand is steady.”

Undeland said demand is expected to rise with increased travel during the Thanksgiving holiday, and that this might act as a “floor” to halt the drop in prices.

The Labor Department reported last week that producer prices for gasoline fell 2.7 percent in October, following a 2 percent drop in September.

Trilby Lundberg, publisher of the Lundberg Letter, which tracks gasoline prices, said 14 percent of the cities recently surveyed nationwide were selling regular, self-service gasoline at less than $1 a gallon.