What Explains the Drop in Gas Prices?

An unexpected drop in demand is leading to lower prices at the pump.

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Two-thirds of Americans oppose higher gas taxes for infrastructure improvements, according to Gallup.

Gregg Laskoski is a senior petroleum analyst for GasBuddy.com

The U.S. average price of a gallon of gas today is $3.50 per gallon. A year ago it cost about 30 cents more. There are many factors contributing to the current decline in retail prices, but perhaps the most notable one is that the world is using less oil and gasoline.

Tom Kloza, the veteran oil industry expert with Oil Price Information Service/GasBuddy, said recently that "the broad demand numbers are suspicious of an economic slowdown, or something beyond unpleasant weather." He reported earlier this month that total petroleum demand was about 401,000 barrels per day below last year’s level.

[See a collection of political cartoons on gas prices.]

OPEC recently trimmed its estimates for global demand growth after its own production dropped to unexpected levels in March. It produced 30.19 million barrels in March, a reduction from the 30.29 million barrels produced in February. 

OPEC apparently is placing its hopes on demand growth from China. "Demand in the second half of this year is seen to be much higher than the first," OPEC said on April 10. "The bulk of the growth is expected to come from China."

But that might be misplaced optimism. Bloomberg reported this week that China has "curbed demand for fuel and petrochemicals as its economy slows." Liao Kaishun, a Shanghai-based energy consultant, said that oil product sales are sluggish and have led to high fuel stockpiles, "so refiners have to ramp up exports to draw down their inventory.”

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Declining retail gasoline prices in the U.S. reflect a supply that outpaces tepid consumer demand. And May could deliver more of the same.

Keep a close watch on prices and commit the trend to memory. If current trends hold up, then the peak price for the year might be the $3.79 national average for a gallon of gasoline posted on February 27.  Even if prices should climb again this year, it may be a long, long time before we ever see a March and April price swoon like 2013 has delivered.

And what makes it especially remarkable is that even the threat of unprovoked attacks by North Korea and, more recently, the terrorist bombing of the Boston Marathon, have had little impact, if any, on crude oil prices that are often hypersensitive to considerably lesser geopolitical events.

Such is the weight of supply and demand fundamentals.

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