Why Are Gas Prices so Low?

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Why Are Gas Prices so Low?

It’s a crazy world we live in where gasoline costs less than milk or even bottled water, but this isn’t something out of a Grimm Brothers’ fairy tale, it’s reality in America today.

From roughly the middle of last year, fuel prices have been steadily falling. According to GasBuddy.com, the national average for a gallon of regular-grade petrol is going for about $1.82 right now. That’s WAY down from the record highs we endured back in the summer of 2008, where drivers were paying more than two-and-a-quarter times as much.

Fuel-Prices-Map

Source: GasBuddy.com

From a monetary standpoint, cheap fuel is great for businesses and families alike. “In the short term it’s good news for consumers because it reduces your cost at the pump,” said Sam Abuelsamid, senior analyst at Navigant Research. But he explained this is also nice for automakers because “they’re able to sell a lot more, large, higher-margin vehicles,” pickups and SUVs that really add to their bottom lines.

The proliferation of cheap gasoline certainly seems to have spurred the sales of trucks. Last month was Ram’s best February ever, with year-over-year deliveries increasing by some 27 percent.

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Likewise, sales of Ford’s money-making F-Series range increased 10 percent, making last month their best performance since 2006. Sales of the Transit van line swelled 70 percent.

It was a similar story over at Nissan where their truck volume was up more than 14 percent, but you get the picture. Americans love big vehicles, especially when oil is cheaper than the barrel it comes in.

Gas-Pump

Still, not everyone agrees that the price of petroleum is spurring the sale of larger vehicles. “I don’t’ think it’s really accurate to say low fuel prices are driving utility sales,” said Stephanie Brinley, senior analyst at IHS Automotive. “It’s utility, it’s feasibility, it’s functionality.”

Brinley explained that memories of the Great Recession are still fresh in may drivers’ minds and fewer people purchase large vehicles, like full-size SUVs, as status symbols. If they do opt for one of these utilities, chances are it’s because they need the capability.

But Why is it So Low?

Looking back at 2008, people thought it was the end of the world. Drivers were paying top-shelf prices for clapped-out Geo Metros in a myopic bid to save money at the pump as gasoline topped $4.00 a gallon. At the time, it seemed like things would only get worse, but obviously the sky didn’t fall, so why are gas prices so low right now?

Source: GasBuddy.com

Source: GasBuddy.com

Brinley said it all comes down to supply and demand; there’s simply more oil getting pulled out of the ground and refined than is getting used. “We’re producing more in the U.S. than we used to,” she said.

The same goes for other regions around the world. According to Abuelsamid there’s “a lot more oil than a decade ago,” with greatly expanded offshore drilling right here at home. Additionally, “[There’s] added production in Iraq, Iran is starting to ramp up their production as part of the nuclear deal and the lifting of sanctions,” he said.

Honda-Clarity

Abuelsamid also noted that traditional oil-producing countries like Saudi Arabia and Venezuela are not cutting output as prices fall because they want to maintain their market share. He said this is something that applies to “most of the OPEC countries.”

However, it’s not just increased production that’s to blame for our record-low fuel prices. “China’s market is slowing,” explained Brinley. “It can [also] have an effect; they’re using less gas.”

Beyond all of this, Brinley said U.S. Corporate Average Fuel Economy regulations, CAFE for short, have made a difference by curtailing consumption. Because of this she noted, “It doesn’t look like the EPA is going to back down on 2025,” which is when manufacturers’ fleets have to average 55.4 miles per gallon.

How Low Can You Go?

But how low will fuel prices go? How long will they stay so cheap? Like all good things, this situation will likely come to an end.

Oil, like wheat or iron ore is a commodity. Accordingly, prices rise along with demand. Brinley said, “We do expect [oil prices] will stay low for the next year and a half,” but after this time they could start to go up again.

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Abuelsamid’s estimate is a little more optimistic. “At some point it probably will [go up], but right now it doesn’t look like it’s going to be … in the next three to five years,” he said.

Of course much of the world’s oil is produced in conflict-ravaged regions. Abuelsamid noted that prices could rise rapidly “if things start to spiral out of control in the middle east.” Anything that would impact Iran or Saudi Arabia’s production could cause problems.

Charting a Course

Automakers have the U.S. government’s 55.4 MPG target locked in their sights. Despite the recent advent of super-cheap gasoline, it doesn’t sound like they’ve taken their eyes off the prize by altering product plans.

Abuelsamid explained they still have CAFE, greenhouse gas standards and zero-emission mandates to wrangle with. They simply can’t afford to back off on fuel economy. “They have to meet those regulations [or] it’s going to cost them a fortune,” he explained.

Plug-In-Electric

If anything, automakers need to work even harder to build economical vehicles, products motorists actually want to drive and that are affordably priced.

“They have to sell more efficient vehicles and more plug-in vehicles,” Abuelsamid said. “Having cheap gas makes it that much harder for them to do that.”

Almost unquestionably, gasoline prices will rise in the coming years, though how much and when is open to debate. “The cost of fuel is something you have to live with … you have to transport yourself,” said Brinely. “You can address your usage but you can’t address the cost,” she added, so enjoy these fairy-tale fuel prices while they last.

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  • smartacus

    They are already starting to climb back up.
    By January 20th 2017, they will be back up to well above $2/gal
    *and interest rates will start going back up too.