NEW YORK (CNNMoney.com) -- Despite a drop of over $10 in the price of oil over the last few weeks to around $65 dollars a barrel, the government predicts crude will still average near $70 for the rest of 2006, according to a report released Tuesday.

In its monthly short-term energy outlook, the Energy Information Administration said 2006 and 2007 spot crude oil prices will average near $70 a barrel.

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EIA expects gasoline prices, which it said fell to $2.62 a gallon Monday from a near-record high of $3.04 a gallon on Aug. 7, to average $2.55 a gallon by January before climbing again next spring.

EIA's bullish price view is based on two things: Rising demand with only a limited increase in supply.

The agency said worldwide petroleum consumption should grow by about 1.2 million barrels a day in 2006 and 1.7 million barrels a day in 2007. In 2005 the world used about 84 million barrels of oil a day.

High prices did cause EIA to reduce the amount it though consumption would grow by 100,000 barrels a day each year from last month's estimates.

EIA said oil production capacity will increase only slightly in 2007, all of which will come from Saudi Arabia.

"Because only limited increases to surplus capacity are expected during the forecast period, existing and potential supply problems throughout the world will continue to raise concern," the report said. "Because of these factors, as well as the continued tight supply-demand balance, EIA expects little relief from current pricing patterns."

Oil prices briefly turned higher following the report but later gave back gains, with U.S. light crude for October delivery trading down 51 cents at $65.10 a barrel on NYMEX.

The report also provided a little boost to shares of U.S. oil majors, with ConocoPhillips (Charts) adding about half a percent while Exxon Mobil (Charts) and Chevron (Charts) rose slightly.

Oil and gasoline prices have fallen over the last few weeks due to cooling international tensions, fears over a slowing economy, the end of the summer driving season, and a so-far quiet hurricane season in the Gulf of Mexico.

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Major U.S. oil source is tapped