October 16, 2014
Gas Prices Continue To Drop Across America, But Why?

Local sources in Virginia and Minnesota are both reporting gasoline under $3 a gallon. Although it's great news for drivers, it could be a sign of a shifting worldwide energy market, and possible future political instability.

According to the Wall Street Journal, the average retail price for gas has dropped 15 percent since late June. With experts saying the trend will continue, Minnesota and Virginia might just be the first states to have gas prices below $3.

Many economists are praising the drop as a big economic relief to America's struggling middle class. If gas prices drop one cent, it means about $1 billion in annual energy savings for the country as a whole, according to Deutsche Bank economist Brett Ryan.

"It's like a tax cut that consumers can use to eat out more often, buy more goods or help save for a new home."

A few factors have contributed to the price drop. First of all, demand has stagnated. Economic growth in Asia has recently slowed down, and Europe continues to be on the rocks as Euro-zone factory output declined.

Second, supply has been skyrocketing, as oil producing countries have been hesitant to rein in production to deal with the new market conditions. OPEC members produced more oil last month in September than in the past 13 months. The production surge shows the divisions and competition within the multi-national cartel. Saudi Arabia is trying to maintain its own market share, even if it means lowering prices. Iran also seems to accept dropping prices.

Then there's fracking.

The WSJ reports that due to hydraulic fracking and horizontal drilling methods, U.S. oil production has risen about 56 percent since 2004, wringing it out of areas previously thought to be out of reach. The U.S. has already become the largest producer of petroleum-based liquids -- natural gas and oil -- thanks in part to the controversial fracking push.

Also in September, non-OPEC members have added another 2.1 million barrels a day to global supply. That's about 2 percent of the daily oil demand.

The price drop for gas and oil is a nightmare for countries like Venezuela that are dependent on oil exports to fund their governments.

According to a Deutsche Bank report, Venezuela needs the price of a barrel of oil to be above $120 to balance its government budget. Angola needs to sell at $98 before it runs a deficit.

Venezuela called an emergency OPEC meeting to discuss the situation.

Russia, also dependent on energy exports, smells conspiracy.

Russian Finance Minister Alexei Kudrin, speaking to Russian state media, said that the price drop is "a kind of agreement of leading countries, importers and exporters, the U.S. and the Middle East, that production will be increased and the price will be kept low."

The worsening Russian prospects will most likely hurt the country even more than the recently imposed sanctions, destroying the already low.5 percent GDP growth rate forecast for this year.

Still, there are more winners than losers, and American drivers are some of the biggest winners in this gas price drop.

[Image Credit: Wikimedia Commons]