Fed predicts gas prices to peak, then fall off over next three years

Economic analysts Stephen P.A. Brown and Raghav Virmani have announced that if current market conditions prevail, gasoline prices are set to rise over the next few months and then fall over the next three years. The two men revealed their findings in the October issue of the Federal Reserve Bank of Dallas' Economic Letter.

In "What's Driving Gasoline Prices?" Brown, the director of energy economics and microeconomic policy, and Virmani, an economic analyst, find that gasoline prices could rise by 20 cents in the next few months and then decline by about 35 cents a gallon over the next three years, with seasonal variations during each year of about 27 cents a gallon.

"Household budgets won't get much relief, but continued high gasoline prices probably aren't going to be an unbearable burden for the economy as a whole," Brown and Virmani write in their report.

The authors use an econometric model incorporating crude oil prices and seasonal and nonseasonal movements in consumption, refinery production, imports and inventories to create a complete picture of gasoline pricing in the U.S. market. The model explains more than 99 percent of gasoline price levels and 56 percent of the weekly changes in gasoline prices.

Brown and Virmani also found that recent market conditions that have driven gasoline and oil prices in opposite directions are short lived.

"Our econometric models confirm the traditional result that crude oil prices dominate movements in gasoline prices, but they also show that seasonal and nonseasonal movements in consumption, refinery production, imports and inventories influence gasoline prices in the short term," they conclude.

The three-year outlook incorporates West Texas Intermediate crude futures prices, which call for oil to slide to $75 a barrel by the end of 2010. As with all estimates, the outlook for crude oil prices can change significantly with economic conditions or geopolitical events, the authors warn.

The October Economic Letter can be found on the Dallas Federal Reserve Bank's Web site.