Gasoline prices may drop to $3.50, but not much more

Gasoline prices will likely continue to fall in the next few weeks as lower oil costs and reduced demand push the price at the pump lower. But a steep drop is unlikely.

The nationwide average price for a gallon of regular was $3.809 on Monday, the Energy Department said. That was down 7.1 cents from a week ago and 7.4% lower than the peak of $4.114 hit July 7. A separate survey from AAA and the Oil Price Information Service found the average U.S. price was $3.81 Monday.

The U.S. average will likely fall another 6 cents to 15 cents in the next few weeks and will be as low as $3.50 in some parts of the country, based on the recent drop in oil prices, OPIS analyst Tom Kloza says.

But prices are unlikely to stage a massive decline. That's in part because many gas station owners lost money in recent months as their costs increased faster than they could raise pump prices. Heavy competition and a desire to maintain sales volume prevented them from keeping up with escalating costs. Now, some of those owners will be trying to recoup those losses as costs fall.

While oil prices jumped 40% in three months before peaking in early July, the average price at the pump rose 23%. The cost of oil accounts for nearly three-quarters of the retail price of gasoline.

Oil prices have dropped 21.2% since peaking July 3 at $145.29. The price of a barrel of crude for delivery in September fell 75 cents Monday to $114.45. That's the lowest since May 1 but still 60% higher than a year ago.

The decline in oil prices has been swift, but some expect the fall to slow, if not stop, soon. That will put a floor under the pump price, says Mary Novak, energy specialist at Global Insight.

International tensions and uncertainty about this year's hurricane season will likely keep oil prices from tumbling. And there is talk that the OPEC oil cartel will cut production when it meets next month. That leads to heightened concern about worldwide supplies. Oil demand, particularly in emerging-market countries, remains strong, and Novak expects oil will not fall much below $110 soon. The result: The average U.S. gas price should flatten out at around $3.65 a gallon.

Still, lower gasoline prices are coming at a good time for consumers, who account for the bulk of U.S. economic activity, says Christopher Rupkey, economist at Bank of Tokyo-Mitsubishi.

"The money in their pockets from income tax rebates is going away, but the … decline in energy prices should put a little bit more spending money into consumers' wallets and purses," he says.