The recent sharp drop in the global price of crude oil could mark the start of a massive sell-off that returns gasoline prices to lows not seen since the late 1990s -- perhaps as low as $1.15 a gallon.
Consumers already have been seeing falling prices at the pump: an average $2.78 in Miami-Dade and $2.79 in Broward, down from more than $3 last month.
''All the hurricane flags are flying'' in oil markets, said Philip K. Verleger, a noted energy consultant who was a lone voice several years ago in warning that oil prices would soar. Now, he tells McClatchy News Service, they appear to be poised for a dramatic plunge.
Crude oil prices have fallen about $14, or roughly 17 percent, from their July 14 peak of $78.40 per barrel. Oil closed Wednesday at $63.97, and prices could fall much more in the weeks and months ahead.
Here's why.
For most of the past two years, oil prices have risen because the world's oil producers have struggled to keep pace with growing demand, particularly from China and India. Spare oil production capacity grew so tight that market players feared any disruption to oil production could create shortages.
Fear of disruption focused on fighting in Nigeria, escalating tensions over Iran's nuclear program, violence between Israel and Lebanon that might spread to oilproducing neighbors and the prospect that hurricanes might topple oil facilities in the Gulf of Mexico.
Oil traders bet such worrisome developments would drive up the future price of oil. Oil is traded in contracts for future delivery, and companies that take physical delivery of oil are just a small part of total trading. Financial players, such as large pension and commodities funds, are the big traders and they're seeking profits. They've sunk $105 billion or more into oil futures in recent years, according to Verleger. Their bets that oil prices would rise in the future bid up the price of oil. That, in turn, led users of oil to create stockpiles as cushions against supply disruptions and even higher future prices. Now inventories of oil are approaching 1990 levels.
But many of the conditions that drove investors to bid up oil prices are ebbing. Tensions over Israel, Lebanon and Nigeria are easing. The hurricane season has presented no threat so far to the Gulf of Mexico. The U.S. peak summer driving season is over, so demand is falling.
With fear of supply disruptions ebbing, oil prices began sliding. With oil inventories high, refiners that turn oil into gasoline are expected to cut production. As refiners cut production, oil companies increasingly risk getting stuck with excess oil supplies.
All this is turning markets increasingly bearish on oil.
''If we continue to build inventories, and if we have a warm winter like we had last winter, you could see a large fall in the price of oil,'' said Gary Pokoik, who manages Hedge Ventures Energy in Los Angeles, an energy hedge fund. ``I think there is still a lot of risk in the market.''
As it stands now, the recent oil-price slump has brought the national average for a gallon of unleaded gasoline down to $2.59 a gallon, according to the American Automobile Association.
Should oil traders fear that this downward price spiral will get worse and run for the exits by selling off their futures contracts, said Verleger, it's not unthinkable that oil prices could return to $15 or less a barrel, at least temporarily. That could mean gasoline prices as low as $1.15 per gallon.
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