Why Are Gas Prices Plummeting?

MILL VALLEY, CA - JULY 22: A customer prepares to pump gas into his truck at a Valero gas station on July 22, 2013 in Mill Valley, California. According to AAA, the national average price for a gallon of regular gasoline rose to $3.67 as prices have surged 12 cents in the past week due in part to the unrest in Egypt and production disruptions at US refineries. (Photo by Justin Sullivan/Getty Images)
National Journal
Clare Foran
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Clare Foran
Oct. 3, 2013, 4:42 p.m.

Last year, rising gas prices in Feb­ru­ary and March fueled a polit­ic­al firestorm ahead of the pres­id­en­tial elec­tion, with Re­pub­lic­ans blam­ing Pres­id­ent Obama for the price hike. Now, however, with midterm elec­tions over a year away, plum­met­ing prices have failed to at­tract polit­ic­al at­ten­tion.

The na­tion­al av­er­age gas price showed its sharpest de­cline in nearly a year, fall­ing 5.4 per­cent in Septem­ber, and it’s still drop­ping. On Thursday, the U.S. na­tion­al av­er­age was $3.38 for a gal­lon of gas, ac­cord­ing to AAA ana­lysts, and prices are es­tim­ated to de­crease by an ad­di­tion­al 25 cents per gal­lon through Decem­ber. At this time last year, the U.S. na­tion­al av­er­age was 40 cents high­er, at $3.78 a gal­lon.

A num­ber of factors have spurred the de­cline, in­clud­ing the sea­son­al shift to cheap­er fuel blends at the end of the sum­mer driv­ing sea­son, de­creased like­li­hood of U.S. in­ter­ven­tion in Syr­ia, and boom­ing do­mest­ic oil pro­duc­tion.

“Con­sumer de­mand is at its highest in the sum­mer, when folks take va­ca­tions. In the cool­er months, kids are back in school, people go back to work full time, and there’s less of an op­por­tun­ity for re­cre­ation­al con­sump­tion,” said Tom Kloza, chief oil ana­lyst for Gas­Buddy.com, a gas pri­cing and in­form­a­tion web­site.

Gas costs typ­ic­ally de­cline in the fall for an­oth­er cyc­lic­al reas­on as well — a switch to cheap­er blends of gas­ol­ine.

To keep smog un­der con­trol, the En­vir­on­ment­al Pro­tec­tion Agency man­dates the use of clean­er-burn­ing gas dur­ing the sum­mer. Those re­quire­ments don’t hold over in­to the winter months. So-called winter blends of gas­ol­ine are less ex­pens­ive, and the sav­ings are passed on to the con­sumer.

“If you think of gas­ol­ine like a cake, there’s a lot of cheap flour that you can use in the winter that you can’t use in the sum­mer be­cause it leads to high­er emis­sions,” said Patrick De­Haan, a seni­or pet­ro­leum ana­lyst with Gas­Buddy.com. “Once you get past Septem­ber 15, it gets a lot cheap­er to bake the cake.”

Cir­cum­stances not tied to sea­son­al events are also push­ing prices lower.

The cost of oil has be­gun to de­cline now that U.S. mil­it­ary in­ter­ven­tion in Syr­ia seems less likely. This, in turn, is con­trib­ut­ing to lower prices at the pump.

“Syr­ia doesn’t pro­duce much in the way of oil, but the pos­sible con­sequences of a U.S. strike could have threatened oth­er areas of the Middle East where oil is pro­duced. Since oil is traded on a glob­al mar­ket, this af­fects the price of oil every­where,” said Mi­chael Green, a spokes­man for AAA. “This has a lot to do with the risk premi­um. Whenev­er there’s in­creased risk of something hap­pen­ing to dis­rupt the oil sup­ply, that raises the price of oil.”

Gas prices have also de­clined due to a surge in do­mest­ic oil pro­duc­tion in areas like North Dakota’s Bakken Form­a­tion. Re­finer­ies across the U.S. are also run­ning more smoothly this year than last, which saw Hur­ricane Sandy cause tem­por­ary shut­downs at a num­ber of East Coast re­finer­ies.

For all these reas­ons, ana­lysts pre­dict the price of gas will con­tin­ue to fall in the com­ing weeks. “You al­ways have to be care­ful when pre­dict­ing prices,” Green said. “But most con­sumers will pay a good deal less at the pump bar­ring a ma­jor hur­ricane, re­newed ten­sions in the Middle East, or sig­ni­fic­ant re­finery fail­ures.”

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