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Why Aren't Gasoline Prices Falling Faster?

Thursday, 7 Aug 2008 | 8:55 AM ET

Oil prices are back up over $120. But that's a sharp decline from July's all-time high over $145. Many drivers watching plummeting oil prices the last few weeks are asking: Why aren't gas prices falling as much?

Here's the answer: It often takes 3-4 weeks to see the move in oil prices impact prices at the pump. It's true that while we have seen oil prices fall over $25 since July 11th, we haven't seen the same kind of dramatic move in gas prices ....yet.

The national average for unleaded gasoline hit a high of $4.11 a gallon back on July 17. Today pump prices are down to $3.85 on average--that's a 6% drop compared to a 17% plunge in oil prices.

Oil hit a fresh three-month low yesterday. The last time oil prices were at $118 in early May, retail gasoline prices were around $3.60 a gallon. Some states, including Oklahoma and Missouri, are there already. While the national average for gas prices may get there eventually, refiners and retail gas station owners have made purchases at much higher prices so they may not be able to bring down their price right away.

But in some regions, gas prices could get down to $3.50 fairly soon. (Barring any major geopolitical or weather event, of course.) Drivers may notice some big variations, though. Even within the same neighborhood, you may see a 20 cent difference in prices depending on what that retailer paid back when wholesale gasoline prices were higher.

So what's the best case scenario - by fall how low can we expect prices to go?

It's always difficult to predict especially since we are in the middle of hurricane season. But by November and December when demand traditionally drops off, the experts I talk to say we can probably expect to see gasoline in the low $3 range.

Questions? Comments? energysource@cnbc.com