Good Times at the Gas Pumps

How Low Can Prices Go?

Good Times at the Gas Pumps
November 17, 2015

Several years ago, if you had asked people at gas stations about the likelihood of seeing gas below $2 per gallon in the future, you would probably have been told there was a greater chance of seeing unicorns parading through Times Square. There is no word about the unicorns yet, but gas has indeed fallen below $2 per gallon in some areas, and the national average is headed in that direction.

According to the US Energy Information Agency (EIA), domestic gasoline prices averaged $2.37 per gallon in September, over a dollar below the average price one year ago. How long can these low prices last, and are they likely to go any lower? EIA predicted that relatively low prices will last through next year and that they will continue to drop through 2015.

In fact, they already have. AAA's Daily Fuel Gauge report shows that as of this writing the national average is $2.20 per gallon. Drivers in 41 of the 50 states can find at least one gas station selling gas below $2 per gallon. AAA predicts that gas prices will rise slightly during the early part of November due to seasonal changes, refinery maintenance, and slight increases in crude oil costs — but those changes are expected to be temporary and the increases will be minimal.

EIA suggests that the national average will dip as low as $2.03 in December, just in time for Christmas traveling. Gas will rise in 2016 but only to an average of $2.38 across the US, well below the average gas price of $3.34 per gallon in 2014.

What is the reason for such low prices?

The main reason is a massive oversupply of oil. The advent of fracking has raised US oil production considerably, and other nations have kept the oil spigots running for several reasons. In Russia's case, their revenue is too dependent to oil to attempt to cut back production. In the case of Saudi Arabia and the other OPEC nations, they are keeping production high in order to drive the more expensive tar sands oil sources and the fracking operations out of business. Iran will join the party soon as a byproduct of the recent nuclear deal that removes sanctions.

Oil prices as of this writing are still quite low. West Texas Intermediate Crude (WTI) is trading at $44.29 per barrel and Brent Crude is trading at $47.42 per barrel. A mere 18 months ago, both of those prices were over $100 per barrel. Most analysts are expecting the price of oil to stay below $60 through 2016, and the World Bank and Moody's dropped their estimate to the $52-$53 per barrel range.

Meanwhile, demand is lower globally due to the slowing world economy. Oil consumption had been booming thanks in large part to the expansion in China's economy. The Chinese economy has slowed, as has economic growth in most of the rest of the world, so demand is not likely to increase and drive up prices.

Prices will fluctuate due to refinery closures, maintenance, and the need to switch blends for seasonal changes, but in general, refinery capacity should not be a bottleneck. Of course, there is always the chance that an accident or natural disaster like a hurricane could disable refinery capacity, but barring such an event, refineries will not affect the price a great deal.

In short, prices probably are not going to go much lower, and they may rise slightly — but compared to the prices we paid a few years ago, gas prices are likely to be stay low for a long time. Enjoy the cheaper gas while it lasts, and use it as an opportunity to pay down any debts you have or save for future large purchases like a down payment on a home.


Photo ©iStock.com/twity1

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