Why Gas Is Getting Cheaper – and Could Hit $3 a Gallon

Gasoline prices normally rise in late spring and stay high through the summer, but this year they appear likely to keep falling.

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To anyone who drives a lot, today’s national average gasoline price of $3.38 a gallon may not sound particularly cheap. But it’s 13% less than what regular gas cost in early April. This sharp three-month drop in the price of gas is even more remarkable when you consider that gasoline prices typically stay high through the summer after they run up in the spring. But this year, they peaked in early April and have been falling every since. Why has that happened, where do gas prices go from here, and what does the trend signal about the state of the economy?

To answer those questions, it helps to consider the normal seasonal fluctuations for gasoline prices. Two main factors create the basic pattern. First is the economy. Demand for specific types of goods varies at different times during the year. Retailers typically enjoy booming sales between Thanksgiving and Christmas, for example, and then mark down items after January 15, when business slows. For gasoline, demand usually increases when the weather improves in April or May, and that continues through the summer. “Good weather and vacations cause US summer gasoline demand to average about 5% higher than during the rest of the year. If crude oil prices remain unchanged, gasoline prices would typically increase by 10-to-15 cents from January to summer,” according to one industry source.

The other important influence on summer prices is the change in the fuel mix. You might think that gasoline is made up of just one thing – namely gasoline – but actually there are small amounts of all sorts of other petroleum products and additives mixed in. Without getting into excessive technical details, refineries basically have to change the fuel mix as winter gives way to summer. When fuel is relatively cool in winter, there’s isn’t a lot of  evaporation and there’s less need to be picky about the makeup of gasoline. But for the summer heat, refineries have to be more careful about the fuel mix to hold down evaporation and limit air pollution and smog. Since summer is more prone to air-quality problems anyway, gasoline is also altered to burn cleaner during the vacation months when cars are packed together bumper-to-bumper on the freeways.

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As a result, gasoline for summer requires some gourmet ingredients and is slightly more expensive. In addition, the fact that refineries have to shut down briefly in the spring for alteration of the fuel mix and general cleaning and maintenance creates a temporary reduction in inventories. That brief spring disruption in supply is the reason gas prices are typically highest before Memorial Day rather than during the summer school vacation when lots of families are on the road.

So why have gasoline prices behaved differently this year, dropping just as the summer vacation season gets under way? It’s the economy, of course. GDP grew at a 3% annual rate after inflation in the fourth quarter of last year and continued relatively strong early this year because of mild winter weather. In fact, although employment normally dips after the holiday selling season, it continued stronger than usual this year. Seasonally adjusted job creation actually rose from 223,000 in December to more than 250,000 in both January and February.

As the winter ended, however, GDP growth turned listless at best. Despite a strong first month or so, the first quarter overall managed growth of only 1.9% at an annual rate, and since then job creation has fallen off a cliff, averaging only 75,000 per month in the second quarter. Given that the economy needs 125,000 new jobs every month to keep up with population growth, the current situation amounts to stagnation.

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Since the oil market is global, weakness in the U.S. theoretically could be offset by growth elsewhere. But other major oil consumers worldwide are suffering their own economic problems. Last Thursday, in fact, the European Central Bank and the People’s Bank of China cut interest rates, while the Bank of England pumped money into the banking system, all in an attempt to bolster their economies. Trouble is, up to now similar stimulative policies haven’t done much good. And all the indications are that global economies continue to slow and that some have dipped into recession, at least briefly.

There is one big wild card in the oil market, however: Iran. Economic sanctions on Iran have made it harder for the Islamic Republic to sell its oil, and industry experts calculate that more than 40 million barrels are in storage, most of it on some 65 tankers in the Persian Gulf. Indeed, it is a sign of just how weak the global economy is that the price of oil has fallen even with so much crude being held off the market. In the event of military conflict to prevent Iran from continuing to develop nuclear weapons, the price of oil could spike upward. And if oil fields are damaged in the fighting, taking large numbers of wells out of production for a year or more, oil prices could soar and remain elevated for some time.

By contrast, even a partial resolution of the conflict that allows Iran to start selling its oil again would flood the market and push prices down even more. Some experts see a further decline of at least 10%. So pray for peace – you might get $3 gas in the bargain.

MORE: A New Age of Cheap Oil Could Undo the Nascent Green Revolution

50 comments
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Jerald Morton
Jerald Morton

love how you people are going to give credit to obama for this. he hasnt created any real jobs so people dont have the money to buy gas so the surplus is way over and the price will drop. Stop blaming people and just fix the real issues in this great country please stop this blame game

dwacas
dwacas

No mention of bakken shale oil reserves or the seaway reversal?

dwacas
dwacas

No mention of bakken shale oil or the reversal of the seaway reversal?

yoshimoto
yoshimoto

Why oh why would we put sanctions on Iran while our economy is so fragile. For who, Israel? Iran is not going to bomb Israel, Iran would be glass in one day. Yet, America has to pay the price for all this. Let's think about America First.

Dawn Reynolds
Dawn Reynolds

If people paid attention to the way politics work they would know why gas is getting cheaper.  Just like 4 years ago it got way cheaper.  Its an election year and what better way to get happy voters to then say Hey look I found a way to lower gas prices.  I would be willing to be 1 million dollars that just like 4  years ago as soon as the election ends with in 6 months the prices will not only be back up but higher then ever before.  It happens every four years folks.

kermit2
kermit2

What is this idiot talking about? Gas has gone up 10 cents/gallon in the past week.

Dawn Reynolds
Dawn Reynolds

Here in AZ it has droped 30 cents/gallon in the last month

kermit2
kermit2

Just saw another article about how it's up in some states and down in others. Unlucky us in upstate NY I guess. Steve

________________________________

From: Disqus <notifications@disqus.net>

To: cllhnstev1@yahoo.com

Sent: Thursday, July 12, 2012 12:19 PM

Subject: [curiouscapitalist] Re: Gas Prices Could Fall to $3 a Gallon | Business | TIME.com

Dawn Reynolds wrote, in response to kermit2:

Here in AZ it has droped 30 cents/gallon in the last month

Link to comment</notifications@disqus.net>

Kevin Birge
Kevin Birge

The economy must have been really bad when the market dictated price and gas was 98 cents a gallon. Cheap energy is not a problem or a threat to anyone except Wall Street, who run the price up. No value added to the final product, nothing but a drag on the economy. The usurious practices of the finance world are destroying America, but you wouldn't know by listening to the likes of the American press.

Bilosopher
Bilosopher

The ideal of the picket fence American family loading their two kids into the car for a two week camping trip somewhere is absurd. No vacations and most kids are born into single family homes where mom is on welfare or flipping burgers. Vacation?? We are a third world nation.

Get a grip. Gas prices are down because interstate shipping is down and demand is falling

Jim Hoffmann
Jim Hoffmann

Dan Bruce sounds like Warren T. Rat in "American Tale:" Who are you going to believe, me or your own eyes?" Hey, buddy, do something more meaningful like reading MY book "Blue Moon President." Perhaps you will learn how our system REALLY works, as opposed to your fantasy of same.

f_galton
f_galton

Low gas prices are bad for the environment.

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IonOtter
IonOtter

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IonOtter
IonOtter

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I should only have TWO sessions on my FB at any time, and NONE of them are in Colorado!

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EnergyExec
EnergyExec

There are only two ways to exert control over gas prices and in direct result, total imports.  One is to tax it, which suppresses the market and of course raises the price.  See Europe.  The other is to go to war to exert political control over the supply.  See US.  Imagine how Americans will react when the Chinese grow strong enough to engage in the latter path.

scariestdemocrat
scariestdemocrat

Couple

quick points - the bush recession started due to a number of factors

but  foremost among them - [A]the two unjustified and corrupt

(Halliburton no bid contract rip off) wars, The bush Medicare

Prescription Drug, Improvement, and Modernization Act (also called the

Medicare Modernization Act or MMA), enacted in 2003 - it produced the

largest overhaul of Medicare in the public health program's 38-year

history and was unpaid for - Initially, the net cost of the program was

projected at $400 billion for

the ten-year period between 2004 and 2013. One month after passage, the

bush administration estimated that the net cost of the program over the

period between 2006 (the first year the program started paying benefits)

and 2015 would be $534 billion. As of February 2009, the projected net

cost of the program over the 2006 to 2015 period was $549.2 billion.

(totally unpaid for with any tax increase or concomitant decrease in

spending - so - china paid for it - thank you very much). [B] housing

bubble

The GOP lead house has refused to fund anything President Obama wants

to do to improve the economy - flatly refusing to pass any stimulus

package unless cuts offset expenses. This has resulted directly in the

loss of American jobs in the public sector - the public sector has shed

more than 600,000 jobs since President Obama took office. The result?

The last three years of job losses at the state and

local government level has been the most dramatic since Labor Department

records began in 1955. In addition, the Bush recession has hamstrung

local governments - aforementioned housing bubble has lowered property

tax revenue to record lows - result... local governments have cut

482,000 jobs since the beginning of 2009.

The housing sector is dragging down any recovery...the impact of

booming home valuations on the U.S. economy since the 2001–2002

recession was an important factor in that recovery. Not so this time

around.

Without housing and without public sector job creation (never mind

insane job loss) - there will be no full recovery, just the anemic GOP

led slow bleed we see today. By this stage in the Reagan recovery,

government employment had risen by

3.1 percent; this time around,

it's down by 2.7 percent.  The unemployment Rate Would Be Near 7.1%

Without Government Job Cuts. We would have our recovery, we would have

high revenue steams to state, local and federal government, we would not

be arguing about cutting medicare we would not be considering hiring a

'no moral center' gop wind sock - puppet like romney for commander in

chief. 

WrentheFaceless
WrentheFaceless

So high gas prices is bad, and low gas prices is bad as well? Guess we just cant win

Michael
Michael

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Michael
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Michael
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Graham Lacey
Graham Lacey

Not that long since the scare stories about the $5 gallon coming to a service station near you this summer. 

Gone awful quiet there on that front. 

John Dyer
John Dyer

Just remember- you will never see falling gas prices and a growing economy.  Its one or the other.

IQMinusOne
IQMinusOne

 Let's reset the price at $1 and let it rise.

Dan Bruce
Dan Bruce

Just don't remember the 1990s.

IonOtter
IonOtter

 Yeah, and don't remember what it *cost* us ever since.  90% of this trouble came from Clinton and BOTH HOUSES repealing the Glass-Steagal Act.  So yay for bi-partisan "legislation".

GOPvictory
GOPvictory

Cheap gas at$3.00!,  2008 it was $1.90 a gallon.

FracDallas
FracDallas

By August, 2008, gasoline in Montana was nearly $5 per gallon. Who was the president? Oh yeah, Bush - a Republican!

GOPvictory
GOPvictory

 The president of either party doesn't  control the price of oil or gasoline. All they can do help or hinder exploration, drilling and moving oil.

Moochie2012
Moochie2012

Prices in 2008 dropped just after the election but take a look at this chart for where they were during Bush's final reign: http://gasbuddy.com/gb_retail_... 

The GOP never fails to be short on truth and long on accusations. 

rockandrollband
rockandrollband

True, but don't forget that it did go over $4 a gallon in  Summer of 2008 before if fell back down.

Scott Horowitz
Scott Horowitz

so then we should average gas prices less than $1.90/gallon when the price bottoms out this time?

Dan Bruce
Dan Bruce

I'm waiting for Romney to blame Obama for these falling gas prices like he blamed him for rising gas prices ... and waiting ... and waiting ... and waiting ... and waiting ... and waiting ...

Guest
Guest

hmm like they blamed BUSH? LOL  But the MSM said Obumbles had no control over the rise of gas prices didnt they?  total hypocrites.

FracDallas
FracDallas

Let me make it supremely easy for you - presidents and their policies do NOT cause gasoline prices to rise and fall. The sole cause of market fluctuation is the greed of speculators and what they can pull off. Sometimes, we get lucky and things implode on them giving us a break.

But, over the past two weeks I have seen my local gas prices jump from about $3.01 to $3.19 per gallon of regular unleaded, so to me it appears that prices are going up right now, and it is not the fault of Obama, Romney to any other elected leader alone. It is, however, the fault of the US Congress for not passing laws that penalize the speculators and limit what they can do and how they do it.

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Nonaffiliated
Nonaffiliated

 It'll happen.  Here's how it will go:  "President Obama deserves full credit for the recent drop in gasoline prices.  This is a natural result of the reduced demand brought about by the President's mishandling of the economy."

vstillwell
vstillwell

Well, I don't see how can be non-affiliated anymore. It's the chicken $hit way out. "They're both just as bad" blah blah blah. Being non-affiliated means you don't have to wade into the muddy mess of primary politics. You can just sit on the sidelines and praise or criticize the process. The process demands participation beyond voting every two years. When people don't participate we  end up with the rudderless Democratic Party and bat$hit crazy Republican Party. 

I live in a Republican state. I see first hand the policies these weirdos constantly pursue. If you think voter restriction laws are as American as apple pie, then, yeah, Republicans aren't bad. 

Nonaffiliated
Nonaffiliated

See me participating?  Here I am.  I just refuse to join either team.  I believe anyone who wholly buys into either party must be incapable of independent thought because they both have good points and bad.  As an independent, I can advocate for the *policies* I support instead of the policies the party tells me to support.   I don't have to try and twist myself into a logical pretzel trying to justify the party's more idiotic positions.   And, since I can vote for good people from either party, I get twice as many to pick from.

Try this sometime:  when the Democrats say or do something stupid, say "That was stupid".  Do it in public with a straight face and without any "but the Republicans..." weasel words.  You'll be surprised how liberating that is.  It's not an easy thing to do.  I know, I am a former Republican (also a former Democrat). 

Dan Bruce
Dan Bruce

Or, Romney may say both at once, since he has two faces on every issue (except making more money for himself and his rich friends, then his message is consistent).

IonOtter
IonOtter

 Nonaffiliate:  Maybe Dan is a poorly educated manicurist, and just doesn't understand that rich people are the only ones who know how to take care of money matters.

Dan Bruce
Dan Bruce

To Nonaffiliated,

I see the Republican Right as a genuine danger to American democracy.

Nonaffiliated
Nonaffiliated

I really don't get you.  I don't understand how anyone could be so fanatically partisan when both parties are playing the same game in the same way. 

Absolutely the Republicans are hypocritically two-faced on gasoline prices.  If they go down, it's because Obama screwed up the economy.  If they go up, it's because Obama screwed up the oil industry.

But, the Democrats (like you) do the same things you claim to detest about the Republicans.  Why is it OK to make money for rich Democrat friends and not OK to make money for rich Republican friends?   Why is it a bad thing when Romney changes his position and not when Obama does it? 

I suspect there really are core policy issues that lead you to the Democrat camp.  But, you hardly ever mention them.  Your posts would carry more weight (with me anyway) if they argued logical points instead of just proclaiming 'Republicans are bad'.

In reality, they aren't really bad.  They just see things in a different way.   Democrats aren't bad, either.  We need  both.  But it would be so much more helpful if they (and I mean we) would stop the schoolyard level bickering and discuss issues with facts and logic instead of attempted character assassination.

Let's take gas prices, for example.  Is there really a problem?  If anything, prices *should* be higher.  I'd like to see the gasoline tax increased.  It would discourage wasteful driving, reduce imports, provide money for highway repair, encourage the purchase of fuel efficient vehicles, cut down on pollution, and reduce road congestion, and put less money in the hands of despotic oil exporters.   What do you think?

Raymond Chuang
Raymond Chuang

The reason why it has fallen are twofold:

1. Speculators ran up the price WAY too high in the spring. As such, too many people ended up with overly-expensive petroleum products and will lose a fortune over this.

2. The continuing soap opera of the European debt crisis has scared everyone into cutting back on consumption, and that has really cut the demand for gasoline.