Why Are Gas Prices So Low?
NEW YORK ( MainStreet) Gasoline prices have been declining recently and are even lower than the prices of last year, with the national average retail price at $3.21 a gallon.
Lower oil prices, the move past the peak summer driving season and the transition to winter fuel mixes are key drivers in the decline of prices, said Brian Youngberg, a senior energy analyst at Edward Jones in St. Louis.
Oil prices have been dipping, because there is plentiful supply in the U.S. while demand for oil globally has been tepid, he said.
Refineries are running relatively well, so there is plenty of supply coupled with the fact that geopolitical issues with Iran have also been easing.
"Gasoline prices have followed oil prices down," Youngberg said. "Oil is obviously the key driver in the direction of gasoline prices. Oil has fallen about 15% since late August before steadying in November to $94 to $95 a barrel. There is plenty of supply with U.S. production continuing to ramp up and demand has been slow."
Gasoline prices peaked in February and were about 50 cents above where they are today, he said. Now gas prices have dropped significantly since peaking in July to just below where they were back in February.
The trend toward lower gasoline prices helps consumers and could boost the economy, Youngberg said.
"Gasoline is a major cost for the consumer, so any relief they receive is positive for them and the economy as a whole," he said.
The downward trend could hold for the near term, Youngberg predicts.
"We expect prices will stay close to or decline slightly more through the end of the year," he said. "Now that we have made the transition to winter gasoline formulas, we see them steadying overall. If they move, it is much more likely downward, but much of the decline is likely done."
Another factor contributing to cheaper gas prices is that the winter blend of gasoline is cheaper and easier to make. This year the winter blend also coincided with oil's slide in prices, Youngberg said.
Gasoline prices will remain low for the short term, said Chris Faulkner, CEO of Breitling Energy Companies, a Dallas oil and gas exploration and production company.
"That is good news for consumers as it will keep gasoline prices depressed as we enter the spring," he said.
Demand for gas has also been declining. U.S. demand for gasoline through the middle of October is up less than 1% compared to 2012, said Youngberg in a report. Demand in 2012 demand was 3% below 2011 levels and 8% below that seen in 2007.
"We continue to believe 2007 pre-recession gasoline demand levels will never be seen again as we expect usage in the U.S. will gradually decline about 1% per year on average going forward," Youngberg said. "This would reflect fewer miles driven, improving gas mileage for new vehicles, an aging population and conservation. However, lower domestic demand will likely not translate into lower prices at the pump due to growing global demand driven by the developing world."