ECONOMY:
 

High gas prices: Recession-proof

Americans may see falling stock markets and employment rates, but worldwide demand and OPEC should keep the heat on oil and gas prices.

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By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Contrary to popular belief, Americans facing a looming recession should expect little relief in the form of lower gas prices, experts say.

Despite recently falling oil and gasoline prices, strong worldwide demand, refinery shortages, and OPEC production cuts should keep gasoline well above $2 a gallon in 2008.

Slower consumer spending and rising unemployment - traditional harbingers of an economic downturn - are unlikely to drastically reduce energy prices. Oil isn't expected to fall below $60 a barrel from its current level of $90 and gasoline should bottom out around $2.30-2.50 a gallon from around $3 currently, experts say.

"That's the floor, even in a global recession," said Simon Wardell, an oil analyst at consulting group Global Insight. "The overall balance is going to remain pretty tight."

In the short run, gasoline prices might slip a bit but long-term both gas and oil prices are expected to remain near record highs.

Fears of a slowing economy - or even an outright recession - should cause retail gas prices to fall to somewhere between $2.50 and $2.80 over the next few weeks, said Tom Kloza, chief oil analyst at Oil Price Information Service.

Kloza noted that wholesale gasoline prices have fallen about 30 cents since the start of the year, and retail prices are just now beginning to come down.

But then recession or no recession, he expects gasoline prices to surge again to set a new record of over $3.22 a gallon sometime between March and May, when refiners leave stocks low and switch over to summer blends and traders anticipate the high-demand summer driving season.

"The same things that make the rally every spring are still there," he said.

But from May onward, he said prices could fall quickly, especially if there is a recession.

Still, he doesn't think they'll go much below $2.50 a gallon.

"I wouldn't go out and buy that Hummer," he said. "It's still prudent to behave as if record gas prices are just one event or one economic recovery away."

Another reason why gas prices will stay high is that there isn't enough oil being refined into gasoline to significantly bring down prices -even in the face of a recession.

Although capacity at existing refineries has been expanded, a new refinery in the U.S. hasn't been built in roughly 30 years - which the industry blames on strict environmental rules and community opposition.

"There's a limit to how far gasoline can fall," said Stephen Schork, publisher of the industry newsletter the Schork Report. "At the end of the day, there is still a dearth in refining capacity," Schork said.

Plus, slack demand for gasoline has kept gas prices from rising as fast as oil prices did at the end of 2007, a downturn in oil prices would not necessarily be followed by a downturn in gasoline prices.

But oil prices should stay above the $60 a barrel mark, according to experts.

Strong growth in Asia, where a recession is seen as less likely, combined with runaway demand in oil-rich Middle East economies, is likely to keep demand, and prices high no matter what happens in the U.S., said Wardell.

Even in a recession, there have only been a couple of years where demand in this country has actually fallen, said Wardell.

"It just doesn't happen," he said.

Schork sees oil prices pulling back to the $60s or $70s if there is a recession and retail gasoline prices in the $2.50 to $2.70 range, but he thinks any pullback will be relatively brief.

"By no means am I predicting the end of the bull run," he said.

And then there is OPEC.

For its part, experts say the cartel would step in with a production cut if oil prices fell too much, which it did at the end of 2006 when oil prices fell to the $60 range.

"OPEC is very much eager to defend prices," said Wardell. To top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.