As oil has dropped about 30 percent from its February high of $109.77 — crude prices hit eight-month lows of under $80 a barrel this week — consumers have found themselves walking away from the gas pumps with fuller wallets. Since the April high of $3.99 a gallon, average gas prices in the U.S. have slipped to $3.47; this is down from around $3.70 at this time last year. (Brent crude, considered the international benchmark, is down to $90 a barrel from a 2012 high of $128.)
Why have prices fallen so much? There are many factors to consider, but the basic formula is fairly simple: Decreased demand plus increased output equals a drop in value. Demand has abated amid mounting fears of a global economic slowdown (Europe and China and jobs, oh my), while global output has increased as Middle East tensions have eased and U.S. production has soared.
Saudi Arabia is pumping out more oil, Libya is exporting again and there is no longer an immediate concern that Iran will be closing the Strait of Hormuz. And the bolstering of the U.S. dollar in the face of weak economic data hasn't hurt. If production continues to outpace demand, it seems likely we'll see sinking oil prices for a while.
Good Timing for the American Consumer
The decreased pump pain has come at a good time for American consumers gearing up for the long road trips that are a hallmark of the lazy, crazy, hazy days of summer. But how long will this last? Could average gas prices actually go below $3 a gallon by the fall, as some analysts have predicted?
Tom Kloza, chief oil analyst of the Oil Price Information Service, thinks it's a possibility.
"I do not believe that prices will continue to free fall into July," he says. But "things change in the autumn. Gasoline demand drops by several hundred thousand barrels per day after Labor Day, and the specifications for gasoline get relaxed on September 15.
"The futures market, which (to paraphrase Yogi Berra) is a poor indicator of the future, is suggesting that wholesale gasoline prices in late October, November and December will be at less than $2.25 a gallon. The numbers imply that nationwide retail prices will be below $3 a gallon, and it would be the first such instance since December 21, 2010."
"In any case," he says, "average prices can be deceiving. The U.S. average price now is $3.47 a gallon, but most people are probably paying something closer to $3.25 a gallon."
Some Already Paying Less Than $3
Some areas of the country, including parts of South Carolina and Virginia, are already seeing gas prices below the $3 mark, although statewide, average prices range from $3.04 to $4.25. There is still a gap between the coasts, with people out West feeling more pinched (California prices are at $3.90, while New York sits at $3.67), but those areas have also seen the biggest recent drops.
Gregg Laskoski, senior analyst at Gasbuddy.com, thinks the calls for below-$3 gas might be a bit optimistic. While he thinks we'll see a national average price "considerably lower than it is now" by autumn, he thinks it will take "an awful lot of things to align very favorably" in order for it to fall to such levels. "And more often than not," he says, "that doesn't happen."
"A number of variables could impact the prices," he says, "one being refinery output. Right now production exceeds demand on a global scale. It is likely that refiners will start to cut back on output [in the coming months], which could flat-line gas prices."
"The situation in the Middle East still plays a major role in case prices," he continues. "If negotiations with Iran deteriorate ... we could still see a major conflict in that area. Then we could certainly see a change in the current direction of oil prices, thus in gas prices."
He also notes that we have just begun hurricane season, and any major storm that occurs could lead to a swift rise in oil prices.
Be Careful What You Wish For
Laskoski is also quick to point out the fact that a sustained decrease in oil and gas prices isn't necessarily something the American people will even want to see. Sure, it's nice to pay less when you're filling up, and a few more dollars in the pocketbooks of the American people could lead to a rise of spending in other areas. But lower oil prices, as noted above, often point to larger problems in the global economy.
"If we see crude oil prices move lower and remain lower for a prolonged period of time, then it is indicative of a larger problem in the U.S. and global economy," Laskoski says. "So you may want to be careful what you wish for with below-$3 gas."