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Gas prices are going lower. Really

chart_gas_prices.top.gifDespite the recent Mideast-related spikes, most analysts say $3.40 a gallon is too high, even in the long run. By Steve Hargreaves, senior writer

NEW YORK (CNNMoney) -- There's perhaps never been a more precarious time for gasoline prices.

If the growing Middle East violence spreads to Saudi Arabia or another big oil producer, gas prices will quickly surpass $4 and maybe even $5 a gallon.

So long as oil supplies from the Persian Gulf remain relatively undisrupted -- and most analysts think they will -- there's a strong case that gas prices could fall 25 to 75 cents a gallon from their current perch of $3.43.

"I'm not buying into this," Addison Armstrong, director of market research at the brokerage Tradition Energy, said of the domino theory in the Middle East.

Before the Middle East uprisings, Armstrong forecasted that gas prices would average about $3 a gallon in 2011. Now, despite all the unrest in the region, he's sticking to it.

That implies that at some point this year, in order to make up for the weeks gas has spent over $3 a gallon, it will have to sell in the $2 range for an extended period of time.

Addison bases his predictions for cheaper prices on the simple supply and demand numbers the world is facing: Right now, there's more than enough oil in storage and spare capacity to cover for a disruption in supply from a place like Libya.

The U.S. Energy Information Administration's forecasts are similar.

EIA currently thinks gas will average $3.15 a gallon in 2011. That forecast is being revised upward to reflect recent developments in Libya and the associated spike in gasoline prices.

But it's unlikely the average will be revised up as high as the current going rate of $3.43 a gallon, said EIA economist Neil Gamson. Again, the implication is prices will fall at some point this year.

Gas in the long run

Guessing where gas prices might go for the rest of the year may be useful in planning a vacation or setting aside spending money, but long-term decisions like what car to buy depend on a long range forecast.

Going out four or five years, there are two schools of thought as to where gas prices are headed.

The first, and more common view, is that they'll be somewhere close to where they are now or lower.

This outlook is based on the belief that worldwide economic growth will remain sluggish for the next several years, that consumers will continue to buy more fuel efficient vehicles, and new supplies will continue to come online.

The supply part of this equation is particularly important.

Supporters of the falling price theory say new discoveries in the deepwater Gulf of Mexico, Brazil and Africa, and unconventional oil from Canada's tar sands and U.S. shale formations should keep the market plenty supplied.

"I see prices below $100 a barrel three years from now," said James Williams, an energy economist at the oil and gas consultancy WTRG Economics. $100 oil translates into roughly $3.25 gasoline.

Tim Evans, a futures analyst at Citigroup (C, Fortune 500), noted that U.S demand has declined by more than 11% from 2007 to now.

Evans also sees a decline in speculator interest, as retail investors learn that making money in the commodities markets takes quite a bit of skill and more than a little luck.

Plus, just because there's unrest in the Middle East doesn't mean the oil won't flow. He pointed to the Iran-Iraq War in the 1980s and the Algerian civil war a decade later. Oil prices were at some of their lowest points ever during those times.

Evans sees oil trading in the $80 range by 2015 -- which translates into gas around $2.75 a gallon.

The counter argument to all this is that oil supplies will not grow as fast as some predict, and demand from places like China, India, and Brazil will be much more robust.

"A supply crunch is coming," said Kevin Norrish, a commodities analyst at Barclays in London.

Norrish is calling for oil prices at $137 a barrel by 2015. That translates into roughly $4.25 gasoline.

"When it comes is difficult to predict," he said. "But at some point we are going back to where we were in 2008."  To top of page

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