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Wednesday, April 9

Oil prices plunge but gas lags behind

By Doug Abrahms | GNS

WASHINGTON - Oil prices have fallen 25 percent over the past month as the war in Iraq has progressed without the feared massive disruption to Middle East supplies, but U.S. drivers have seen little relief at the pump.

Gasoline prices nationally have dropped only 6 percent - about 10 cents per gallon to $1.63 - from record highs last month of $1.73 for regular unleaded, according to the Energy Information Administration. And prices could even start rising again in some regions as refiners gear up for mixing their summer blends of gasoline, which temporarily slows production.

"We really could find ourselves in the predicament of seeing relatively low crude prices and perhaps stable or rising gas prices as we head into the summer months,'' said Geoff Sundstrom, a spokesman for AAA, the nation's largest motorist organization.

The dramatic drop in oil prices follows a run-up caused by worries about potentially large oil disruptions in the days before the war started. But the incursion to remove Iraqi leader Saddam Hussein caused little damage to Middle East oil fields compared with the more than 600 fires set in Kuwait during the Persian Gulf War in 1991.

World oil supplies should continue to increase as Venezuela rebuilds its infrastructure after a strike last fall shut down its exports for months, said John Lichtblau, chairman of the Petroleum Industry Research Foundation in New York. Iraq's oil eventually will enter the market and prices should drop further.

But consumers hoping to see a replay of the gulf war when gas prices dropped by 30 cents a gallon after a few weeks, might be disappointed this time around.

That's because U.S. oil supplies are very tight compared with 1991. Until recently, refiners had been maintaining low inventories of oil because of high prices, said John Kingston, global director of oil at Platt, an energy research firm.

"The ultimate price of gas over the next few months will not be set by the war in Iraq,'' he said. "You've just got very tight inventories.''

Analysts generally expect gas prices to drop a bit in the coming months, barring a dramatic event in the Middle East. The Energy Information Administration this week predicted national gas prices of $1.56 for regular unleaded this summer, down from a high of $1.73 on March 17.

Gas prices have fallen 10 cents a gallon compared with a 24-cent-per-gallon drop in oil prices since March, said John Felmy, chief economist for the American Petroleum Institute, a trade group of major oil companies. Gas prices traditionally lag oil prices on the way up and on the way down, he said, because it takes six to eight weeks between the time oil is purchased until it is refined and sold as gasoline to consumers.

But politicians have grown increasingly concerned about both high gas prices and sudden increases at the pump.

Last year, the Hawaii legislature voted to allow the state to cap gasoline prices based on an average of prices in West Coast markets. Sen. Barbara Boxer, D-Calif., introduced a bill this year that would require the Federal Trade Commission to investigate a state gas market for manipulation any time prices rise more than 20 percent in three months.

"We need to put rules in place to deter market manipulation. Otherwise we risk serious price gouging with no accountability to consumers,'' she said.

And another trend is making gas prices swing more wildly - the oil industry moving to hold smaller amounts of reserve oil and gasoline to cut down on costs. That can lead to more supply shortages, especially when unforeseen events occur like pipeline ruptures or Middle East wars.

"That's a great (system) for the shareholders as long as the economists forecast fuel demands carefully,'' said AAA's Sundstrom. "But when their projections turn out to be wrong, we end up with a shortage, and prices skyrocket.''