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Buying & Leasing a Car

The Road Back to $2 Gas

Oil prices seem to be stuck on high. But is a big break possible? What set of circumstances could do the trick?

Motorists can expect a break at the pump soon, with gas prices dipping from an average of $2.95 a gallon to around $2.75 by year-end. Welcome, yes, but issues of supply and demand and geopolitical factors continue to conspire, hinting that we won't catch much more of a break in 2007. Still, some energy analysts and economists see a brighter picture -- the possibility of a sharp drop in the price of gasoline within 12 months, to as little as $2. We asked those experts to speculate with us about what might occur to get prices to that level.

A big chunk of oil's price comes from a constant fear that supplies will be disrupted. However, world crude inventories are ample, so if oil traded in line with other commodities, it would be falling from $70 or $75 a barrel toward an eventual $50 or thereabouts. (Every $10 drop in crude takes roughly 50 cents off the pump price.) The damage to BP's Alaska pipeline that pushed gas prices past $3 in August is looking less grim. But traders aren't lowering their bids, citing conflicts in the Middle East and Nigeria and the chance of monster storms. At some point, though, the disruption premium may vanish. "The bogeyman we fear is far worse than what the reality is," says Jim Paulsen, an economist with Wells Capital Management.

Scare stories aren't all that's keeping prices high; a worldwide economic boom is partly responsible. But many economies are now decelerating. Domestic use of gasoline is 1.3% below last year's levels. At the same time, energy companies are working flat out all over the world. More oil rigs are in operation than at any time since the early 1980s. "Non-OPEC oil is ramping up quickly, and it's hard to stop that train," says Mark Zandi, chief economist at Moody's Economy.com. New supplies could outstrip growth in demand worldwide by about one million barrels a year for the next two years. That could lead to still more savings at the pump.

The immediate relief comes from the change in seasons. In summer, you burn a more expensive, smog-fighting blend of gasoline. The price leap this year was magnified as the safety of a fuel additive came into question, forcing refiners to substitute costlier ingredients. Cheaper gasoline blends start in October. Plus, says Tom Kloza, senior analyst at the Oil Price Information Service, a private newsletter and data publisher, "by late September, the hurricane season is in the rearview mirror and folks have completed their vacations."

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If enough favorable news feeds into the marketplace all at once, gas could settle at much lower prices across the first half of next year. The U.S. and global economies will eventually grow faster again, so the floor could become $2 to $2.25, with the pump price then tracking inflation. Right now, this remains speculation. But it's nice to think about as you stand at the pump.