Gas prices to find their middle ground in 2009: expert

• Aaron Smith, CNNMoney.com staff writer
• Thursday January 1, 2009, 8:17 am EST

This is a year drivers will never forget - gas prices surged and crashed at unprecedented levels.

"We've never had a year where we had these extremes - 2008 was really a tale of two markets," said Ben Brockwell, director of data pricing for the Oil Price Information Service.

Gas hit a record price $4.114 per gallon on July 17, according to a nationwide average from the motorist information group AAA. That's a 28% jump from the year-ago average of $3.043.

But, since hitting its summertime peak, the price has plunged nearly 60%, ending the year at $1.617. On Thursday, AAA reported the national average was up 0.1 cent to $1.618 a gallon.

The demand for gas dropped in tandem with the crashing economy. Drivers left their cars at home and took public transportation to work. Instead of road trips, they took low-budget 'staycations.'

"As far as '08 and gas prices, I'd have to say it was a year without historical precedent," said Robert Sinclair, AAA spokesman for the New York area. "This extreme swing is reflective, I think, of the power of the motorist to dictate the market."

What goes up, must come down

The spike in prices panicked drivers and sparked a debate in the presidential campaign.

As gas prices hit record highs this summer, more people took public transportation and rode bicycles to work while sales declined for SUVs and trucks. Corn and soy farmers enjoyed a surge in prices as demand rose for biofuels, and the airlines staggered beneath the soaring price of jet fuel.

During the campaign, Democrat Barack Obama vowed to spend $150 billion over 10 years to bring renewable energy technologies to market. Democrats pushed for an increase in research funding for alternate fuels and better efficiency. Republicans chanted "drill, baby, drill" and pushed for increased domestic drilling in offshore locations and the Alaskan Reserve to alleviate the dependence on overseas producers.

President Bush urged the Organization of Petroleum Exporting Countries to churn out more oil in a bid to lower prices, but it refused. Energy experts and politicians lashed into oil speculators for artificially inflating the prices, blaming them for the meteoric rise.

Then, within months, as the economic crisis deepened, demand for oil slowed and gas prices plunged. OPEC ramped up production, but flooding the market with oil failed to halt the fall.

"With the bad economy and people driving a lot less, some 10 billion fewer miles, gas prices have dropped," said Sinclair of AAA.

Peter Beutel, energy analyst for Cameron Hanover, compared the plight of the middle class in 2008 -- hit with its own confluence of factors -- to the charge of the Light Brigade in the Crimean War.

"It found cannon to its left with higher energy prices, cannon to its right with higher food prices and cannon in front of it with collapsing housing values," said Beutel. "The only thing that took out the cannon on its flanks was the ongoing recession."

The shape of things to come

Going into 2009, some analysts expect gas prices to level off, possibly finding a middle ground.

"I think we've gone from a high extreme to an over-correct extreme," said Brockwell of OPIS, projecting that unleaded gas will rise to the "market average" of $2.25 a gallon in 2009. "I think 2009 is going to help find the equilibrium point."

Sinclair of AAA believes that the volatility of 2008 will continue to change driving habits in America. He projected a "strong drop" in vehicle sales, "with greater emphasis on fuel economy with diesels having more prominence." He said Americans are less likely to buy SUVs when gas prices are cheap, out of the expectation that prices could rise again.

"America is a very different place now," said Sinclair. "People are faint out of fear of what the future holds."