Why Are Gas Prices Going Down?

Matt Reis - Author

Dec. 14 2014, Updated 1:10 p.m. ET

Consumers are almost afraid to ask. Gas prices have plummeted in recent weeks and motorists have rejoiced, enjoying the relief on their budgets and freeing up some money just in time for Christmas. On Friday, December 12, the price of regular gas nationally continued its fall, dropping to $2.60 per gallon according to the AAA Daily Fuel Gauge Report. The lowest state-wide price was in Missouri at $2.29 per gallon for regular gas.

As any holidays involving travel approach, gas prices are usually expected to rise but this is not happening. All good things come to an end, as the saying goes, but still the average American has been cautiously asking – Why are gas prices falling and how long will it last?

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The most obvious and direct reason for the fall of gas prices is the drop in oil prices which have fallen to $57.81. This is remarkable considering the oil prices were well over $100 per barrel just this past summer.

The reasons for the drop in oil prices are a story in themselves, and involve both global and national factors.

Across the globe, increased oil production and decreased demand in Europe and other parts of the world has helped to depress oil prices. All of this is in spite of unrest caused by militants in the mid-East, the rise of ISIS, fighting in Libya, and the conflict over Russia’s involvement in the Ukraine. Any of these would have resulted in an abrupt rise in oil prices in the past, but have not been sufficient to halt the falling prices this season.

In recent years, the increase in oil prices to over $100 per gallon have driven the development of more energy efficiency in all areas of the European economy as well as the U.S. Russia’s increase in production has also bolstered the supply in Europe. It is important to note that some of this decrease is due to the global depression which has reduced demand. An opposite effect could be seen in the future as industrial production increases because of lower prices for energy.

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In the U.S., the demand for gas has decreased as a result of better fuel mileage. According to the Washington Post, mileage of U.S. vehicles improved from 20.8 to 25.3 miles per gallon between 2008 to 2014. More important, though, is the strong supply in both oil and natural gas. Recent higher oil prices made it attractive for U.S. companies to reconsider sources for oil and natural gas that were not previously profitable. The oil industry developed new techniques like horizontal drilling in shale to get at reserves that were not economically attractive before.

Still, in the face of falling oil prices, the Organization of the Petroleum Exporting Countries (OPEC) has declined to reduce production. This will help to keep oil and gas prices falling in the near future.

TheInternational Energy Agency indicates that high energy production in the U.S. will continue in 2015 although oil lower prices may slow energy technology development. The greater production will continue to hold down gas prices.

A variety of economic factors may cause other problems in the economy that could ultimately lead to a recession. However, the effect of all of the interrelated factors on the economics of oil production, heavily influenced by international politics, is difficult to predict.

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In the long term, consumers will continue to affect demand by continuing the steps that have helped to cause the fall in oil and gas prices in the first place. These include the use of energy-saving measures such as home insulation, the use of energy-efficient lighting, the upgrade of heating and cooling systems as the opportunities come along, car pooling and the use of public transportation, and purchasing higher mileage vehicles.

Gas prices are likely to continue to decrease in the near term without an abrupt rebound. Losses in the stock market this past week were reported to be a result of the effect of lower oil and gas prices on the energy industry. At the same time, lower oil prices will benefit other industrial sectors. Lower gas prices will continue to benefit consumers and the businesses at which they spend money. Lastly, lower gas prices and higher consumer confidence that will accompany it will likely be a major factor in the next presidential election when the state of the economy will certainly be hotly debated.


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