Millions of Americans are set to get a nice big gift from the oil industry this Christmas: gasoline prices hitting $2.50 per gallon this holiday season.
AAA Fuel Gauge reports that the “national average price for regular unleaded gasoline could test $2.50 by Christmas, and likely will fall to the lowest level since 2009 in a matter of days.” The U.S. national average gas price hit $2.67 on Monday, the lowest price since February 23, 2010.
Gas prices have already fallen more than one dollar since the price peak this year of $3.70 per gallon in April 2014. In the last week alone, prices dropped ten cents. In the last month, prices fell 27 cents, according to AAA.
“The average price for retail gasoline historically declines from fall into winter due to a number of factors including decreased demand,” AAA Fuel Gauge report. “Consumers can expect to see the price at the pump tick lower as we approach the New Year, however, crude oil would have to fall by another $25 to $30 per barrel to cause the national average to drop below the $2.00 per gallon threshold this winter, which remains unlikely.”
So why have gas prices fallen so dramatically this year? The simple answer is hydraulic fracturing (fracking) coupled with horizontal drilling. The long answer is that the fracking-led U.S. oil boom has vastly increased the supply of oil above demand — lowering the price. Factors like weaker economic growth in China and Europe have also contributed to lower oil prices.
“The price of oil accounts for approximately two-thirds of the price at the pump, and a $10 per barrel drop in the price of crude oil results in about a 25-cent drop in retail prices for motorists,” AAA Fuel Gauge notes.
As the price of oil falls, the price of refined goods like gasoline fall as well. Right now booming U.S. oil production contributed to gas prices below $3 per gallon in 46 states and Washington, DC.
“The nation’s most expensive markets are Hawaii ($3.78) and Alaska ($3.44), followed by the Northeastern states of New York ($3.08) and Connecticut ($3.02),” AAA reports. “Consumers in Missouri are paying the least per gallon to refuel their vehicles at $2.37 per gallon.”
“While it is still unlikely that any state’s average will fall below $2.00 per gallon, there are individual stations in these cheapest markets where motorists can currently fill up for less than $2.00.
So are falling gasoline prices here to stay? Maybe not.
A major factor to consider when thinking about the long term trends in oil production is the world’s most powerful cartel: OPEC.
OPEC controls 81 percent of the world’s crude oil reserves and production from members states, especially Saudi Arabia, greatly influences the international price of oil.
Over Thanksgiving, OPEC opted not to cut production this year to stem falling crude oil prices. Some energy experts say OPEC is trying to drive investment and drilling activity out of the U.S. with low prices.
“In an attempt to protect its share of the global market, Saudi Arabia, OPEC’s second largest member, is sustaining its recent price cuts and is offering barrels of oil at prices not seen in at least 14 years,” AAA notes. “This move could possibly put pressure on U.S. crude production, which is at its highest level in 30 years, and has been a leading factor for the global oil market’s increase in supply. The new oil production that has come online in the U.S. in recent years is generally understood to cost more to get out of the ground than oil produced in Saudi Arabia.”
“If oil prices continue to fall, this more expensive U.S. production could stop being profitable, which could take some production offline until prices increase again,” AAA notes.
But the oil industry doesn’t predict a major slowdown in production even with low prices. Some experts say production in places like North Dakota can continue even with prices as low as $45 to $50 per barrel.
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