College of Business: University of Illinois at Urbana-Champaign

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Post-Ike Gas Prices Should Level Off


9/16/2008

Hurricane Ike threatened to send already steep gasoline prices soaring, despite a steady decline in crude oil prices that reached a seven-month low this week, a University of Illinois economic expert says.

But finance professor Don Fullerton says pump prices will likely stabilize again now that U.S. refineries apparently ducked a production-crippling blow when Ike roared through the Gulf of Mexico last weekend.

Still, gas prices will remain generally higher than a year ago, so consumers should continue to eye conservation, said Fullerton, a former deputy assistant secretary of the U.S. Treasury Department and a leading researcher on the economic impact of environmental regulations such as gasoline taxes.

“Buy a smaller or newer car, or a hybrid,” he said. “Walk to work or ride a bike. Handle more errands on the same trip, instead of multiple trips. Vacation nearer to home. The next time you change houses, consider moving closer to your place of work.”

Gas prices rose Monday to a national average of $3.84, up nearly 17 cents from Friday, according to auto club AAA. But Fullerton says prices should soon dip again if early estimates hold that show Ike destroyed or damaged only a small portion of the 3,800 production platforms in the Gulf.

Prices had been slowly retreating before Ike raised fears of long-term refinery outages. Fullerton, a member of the U. of I. Institute of Government and Public Affairs, says the earlier spike that sent prices to record highs near $4 a gallon may have stemmed from a market misread of both supplies and demand.

Meanwhile, supply disruptions caused by Ike have sparked reports of price gouging in some parts of the country, with prices reaching $5 a gallon.

U. of I. economist Fred Giertz says hefty, short-run price increases can serve a social purpose, especially in evacuation areas, because they conserve fuel by making people more careful about how they use it.

“Within 50 miles of Galveston, if gas had been selling for usual prices, people would have filled their tanks whether they needed it or not,” said Giertz, an IGPA member and the interim head of the university’s economics department. “But if it’s $7 a gallon, only the people who really need gas will stop.”

(Story courtesy of the News Bureau)

UIUC College of Business