What’s Causing Gasoline Prices to Drop?
The retail price at the pump is down by at least 70 cents per gallon in most every state from a year ago. In fact the price has dropped more than $1.00 in over 40 different states. So, what’s causing this drop in gasoline prices?
Gasoline prices are down because it is a distillate of oil so as crude oil drops so do the byproducts. The US imports millions of barrels each day and at the same time has almost doubled our crude oil production to roughly 9 million barrels a day. This adds more supply to the global markets and pressures prices to the downside. Another factor is the increased use of natural gas to produce energy (power plants, generators etc) that previously consumed oil leaving more supply available. In addition, Europe still hasn’t pulled out of its recession and struggles with a slow economy and consumes less oil which adds pressure to lower prices. Oil is part of a global market and every oil consuming region is affected by these factors.
How Low Can Gasoline Prices Drop?
In oil producing countries like the United States, the cost to produce oil is more expensive and the further oil prices drop below $70 a barrel their profit margins shrink considerably. This forces more and more US oil companies to stop production as the oil prices continue to drop. In addition, countries like Russia rely heavily on oil revenues to fund government services. When this revenue drops so do the social programs which can cause social unrest. These are typical reasons for world oil prices to move back up.
Consumers feel the relief at the pump and use the savings to drive more and to purchase items like large gas guzzling trucks. These reactions increase gasoline consumption and kick start the laws of supply and demand. The lower prices mean less gas tax revenue for individual states and could entice politicians to raise gasoline taxes higher. Which is why some experts see the price bottom at $1.75 where supply and demand forces balance out.
Gasoline and oil’s historical reaction to sudden plummeting prices takes about 6 months to recover and move back above $2.50 per gallon. Oil products like propane, gasoline, and diesel remain exposed to these volatile price swings and extended periods of high prices. Did you know that NGV fleets can negotiate below retail prices on natural gas for 5 years? This means they can guarantee that their price per gallon stays at $1.80 for 5 years.
When was the last time you saw stable gasoline prices for 5 years? Get stability with CNG.