Gas Prices: Here’s Why Gasoline Prices Are So Low

Gas PricesWhile the negative oil price forecast has not been consistent in translating to lower gasoline prices, it looks like prices at the pump will be declining soon.

A power issue in August at one of BP’s refineries in Indiana was mostly to blame for a spike in U.S. gas prices, pushing the national average up higher than expected. (Source: Bloomberg, last accessed September 8, 2015.)

The effect was that gas prices in the Midwest shot up by approximately $0.50 per gallon. Continued low refinery output from a Chevron facility in California is similarly pushing gas prices higher than they should be in the region. (Source: UPI, last accessed September 8, 2015.)

Last week’s national average retail price for one gallon of unleaded regular gasoline was $2.39 a gallon, which is approximately 2.8% lower than it was last week, and eight percent less than a month ago. (Source: EIA, last accessed September 8, 2015.) Gasoline’s national average price is about 30%, or $1.04 a gallon, less than it was at this time last year.

While it’s true that the national average price of gasoline right before the Labor Day long weekend was at its lowest in about a decade, it is estimated that were it not for the aforementioned refining bottlenecks, prices would be even lower still.

Indeed, data from the Energy Information Administration (EIA) shows that gas prices during the pivotal holiday weekend, one of the busiest driving periods of the year, was at an astounding 11-year low. (Source: EIA, last accessed September 8, 2015.) Just how low? A gallon of gas this past weekend cost you about $0.95 less than it did during Labor Day weekend in 2014. (Source: Energy Collective, last accessed September 8, 2015.)

Price data from the EIA indicates that retail gasoline prices were at an average of $3.49 a gallon in September 2014, falling by three percent by the first week of October 2014. (Source: EIA, last accessed September 8, 2015.)

This is all good news for the consumer, because we are set for a decline in gas prices once the supply issue resolves itself.

These continued refinery bottlenecks are keeping prices higher than they should be, but a switch from expensive summer to cheaper winter blends of gasoline will be a net industry win, allowing for refiners to make more profit. (Source: OilPrice, last accessed September 8, 2015.) It will also drive gasoline prices down, however, which benefits the consumer.

How Is This Possible, Though?

It’s refiners themselves who might be helping you save money at the pump. September 15th marks the date at which refiners switch to the winter grade of gas, a refined product which is cheaper to produce than its summer blend. Winter-grade gas is less technologically intensive to produce.

Translation: this allows refiners to sell gas for cheaper while increasing their own bottom line.

Indeed, several large American cities have recorded average retail gas prices under $2.00 a gallon. (Source: GasBuddy, last accessed September 8, 2015.) South Carolina is the only state to post a state-wide average price under $2.00 a gallon, at $1.96.

What About the Oil Price Forecast?

Given the volatility we are seeing across markets, predicting the price movement of crude oil is becoming a guessing game. But economic fundamentals cannot be ignored, and they strongly point to a downward trend in the price of oil.

Global oversupply, half-hearted demand, fears of economic collapse in China, and the threat of an Iranian return to the global oil markets is likely to keep prices low for the time being.

What Does This Have to Do with Prices at the Pump?

Low crude oil demand will translate more and more into a decline in gasoline prices. As we reach the end of summer driving season and refinery bottlenecks in the U.S. are eliminated, there will be more gasoline for a smaller market. Refiners will be producing this gasoline for less money, allowing them to match slowing demand by reducing their retail prices.

The overall effect is likely to drive gasoline prices even further down, which is good news for your average consumer.