Where are summer gas prices headed? © Corbis

Extra5/25/2010 8:00 PM ET

Where are summer gas prices headed?

Memorial Day weekend typically offers a preview of higher summer gas prices. But in recent weeks, pump prices have actually dropped.

[Related content: gas prices, travel, economy, oil, cars]
By Elizabeth Strott
MSN Money

Gasoline prices are falling just as the busy summer driving season is about to heat up. But drivers should take the decline in stride, as it comes only a few weeks after prices hit a 19-month high.

In early May, the Energy Information Administration's Short-Term Energy Outlook had forecast a national average of $2.94 a gallon for the summer, up from last year's $2.44, and average prices came very close to that forecast -- weeks before the summer even began.

The national average reached about $2.93 a gallon in early May, the highest level since October 2008, but prices have been declining in recent weeks amid fears of a slowing global economic recovery and worries about Europe's debt crisis. The national average price of a gallon of regular gasoline fell to $2.78 a gallon today, a decline of about 15 cents in about three weeks.

The agency plans to release its next update June 8.

Geopolitical events in the Middle East or a hurricane could push prices higher, but a spike to $3.50 a gallon would probably require an increase of $40 to $45 a barrel in the price of crude oil, said Tom Kloza, an analyst at the Oil Price Information Service. Without such a jump in crude or a large federal tax hike on gasoline, there is not much of a case for prices above $3 or close to $3.50, Kloza said.

The average price of gas hit an all-time high of $4.114 a gallon on July 17, 2008.

Impact on consumer spending

Consumer spending has recently been showing some hints at life, but even a small increase in gasoline prices could hinder a turnaround.

"If gas becomes too expensive . . . that is going to have an effect on discretionary spending," said Troy Green, a public-relations manager at AAA. Higher prices at the pump would mean that people wouldn't have the money "to spend on other things, like clothes, new computers or a new car."

The economy might not be able to handle gasoline above $3 per gallon for long, Green cautioned.

The thought of high gas prices is a worry for restaurateur Dave Magrogan, who opened his 10th restaurant, Harvest Seasonal Grill and Bar, last weekend in Glen Mills, Pa.

Gas prices directly affect the restaurant business, Magrogan said, and many guests likely will trade down or avoid dining out altogether if there is a price spike. Moderate price increases could cut restaurant sales by 5%, and a big jump in gas prices could decrease sales by up to 20%, he said.

If gas prices remained high, vendors could pass on surcharges in just a few weeks, "much faster than in the past," Magrogan said, because many small and midsize vendors are still struggling with tight credit markets. "They will not be able to absorb a temporary fuel price increase," he said.

Long-term high gas prices would "create the perfect storm: decreased guest counts, vendor fuel surcharges and commodity price increases," he warned.

And then there is the tipping point when motorists start changing their driving behavior.

It could be $3 or $3.50 -- there is no exact number, Green said, "but it's probably lower in this economy, this year, than it was four to five years ago, when the economy was running on all cylinders."

Higher gasoline prices will also weigh on consumer demand, Kloza said. "Gasoline is . . . something that has an embroidered 'State of Americana' on it. There's a huge portion of our population that believes it's our birthright to have relatively cheap fuel," Kloza said.

Continued: Comparing gas prices

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