Gasoline Prices Are Falling – Here’s Why It’s Happening And Can It Continue

A customer pumps gas at an Exxon gas station on July 29, 2022 in Houston, Texas.

Brandon Bells | beautiful pictures

Gasoline price is under $4 for the first time since March, but the market remains precarious and experts say it is too early to tell if the drop will hold.

According to AAA, the national average for a gallon of gasoline has fallen for the last 58 consecutive sessions and is now $3.99 per gallon. The drop from June, when the price broke above $5, has been swift.

Here’s what could happen next.

Why did the price drop?

Pump prices have dropped for a number of reasons.

There is a popular saying in the commodity market that “the cure for high prices is high prices.” And that has been proven to be true. In other words, high prices reduce demand, which lowers prices.

Some driving is necessary – to get to work, for example – but with record prices, consumers may decide not to take a road trip or carpool with friends rather than drive alone. We’ve seen this show up in government consumption figures, which show a drop in demand.

Some states have also suspended their gas taxes, which has artificially pushed prices lower.

But the main cause of the drop was the drop in oil prices. Crude oil is the biggest factor affecting gas prices, accounting for more than 50% of the value we pay at the pump.

West Texas Intermediate Crude Oil, the US oil benchmark, rose above $130 a barrel in March after Russia invaded Ukraine, sending global energy markets reeling. This is the first time WTI has traded at that level since 2008.

But since then the price of oil has dropped, and so has the price of gasoline.

WTI traded at $93.51 a barrel on Thursday, a far cry from $130 just a few months ago. In recent weeks, growing recession fears have sent prices plunging. Oil is vulnerable to any perceived softening in global economic conditions as recessions typically lead to lower demand for oil and petroleum products.

In addition, Chinese demand has weakened as the country battles Covid cases. And the US has taken unprecedented measures by releasing record amounts of oil from the Strategic Petroleum Reserve in an attempt to drive prices higher.

Pump prices have become a major issue for the White House ahead of the upcoming midterm elections, and President Joe Biden has repeatedly said his administration is doing what it can to ease the burden on consumers. use.

Will the price stay low?

A move below $4 raises the question of whether the price will continue to fall. Experts say the relief may be short-lived.

First, while WTI is far below its March peak, it is up more than 5% from last week. And gasoline futures, while also below recent highs, are up 10% from last week.

“The chain of daily declines in retail gasoline prices is coming to an end as crude oil and refined product futures prices rise from recent lows,” said Andy Lipow, president of Lipow Oil Associates.

The global energy market is still evolving and there are a number of factors that could push prices higher in the coming months.

Refineries are operating at full capacity to keep up with demand. A storm or other event that shuts down refineries could push up gas prices as alternatives are not available as Europe is also looking for petroleum products.

The historic US release of barrels from the Strategic Petroleum Reserve will end this fall, taking away some of the supply in the market. Also, the SPR will need to be refilled. A rebound in economic activity in China could also boost demand for petroleum products.

In addition, all European sanctions on fuel purchases from Russia have not yet come into effect. The country is a major energy producer, and so the EU’s scramble for supplies from elsewhere could drive up global prices.

All of this is set against a backdrop of high demand. The International Energy Agency said on Thursday that demand for 2022 increased by 2.1 million bpd, 380,000 bpd higher than its previous forecast.

Patrick De Haan, head of petroleum analysis at GasBuddy, said in a tweet Thursday that the price drop could stall over the next five to 10 days. But he added that the fall could be “short-term.”

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