The cost of gasoline is falling so fast that it is beginning to put real money back in the pockets of drivers, defying earlier projections and offering an unexpected gift for the holidays.
Filling up is now as cheap as it was in February, just before Russia’s invasion of Ukraine touched off a global energy crisis. AAA reported the average nationwide price of a gallon of regular Wednesday was $3.50, and gas price tracking company GasBuddy projected it could drop below $3 by Christmas. And all of that relief probably helped drive robust shopping over Thanksgiving weekend.
“People are realizing that they might be back to spending $50 to fill their tank instead of $80,” said Emma Rasiel, a professor of economics at Duke University. “It is the main signal consumers notice on inflation. It is the one thing they are likely to track, how much it has gone up or down, because every week they need to fill up their car.”
But Rasiel cautioned cheaper gas can also give consumers the wrong idea. Prices of other goods and services are much less volatile, and there is no indication that this moment of more affordable fuel is pushing the cost of other things down.
Even as the plunge in prices at the pump helps fuel a national holiday shopping spree, it is a reflection of the financial strain consumers and businesses are confronting worldwide. Prices are going down because demand for oil and gas is falling as countries brace for recession, COVID-19 outbreaks in China threaten major financial disruption, and drivers cut back on gas-guzzling as they try to save money to cover skyrocketing mortgage payments and stock market losses.
Earlier worries that sanctions on Russian oil would create a shortage in supply and send prices soaring toward the end of the year have, for now at least, given way to ailing economies and jittery financial markets.
“We’re heading into serious recession in Europe and further economic slowdown in the U.S. as people struggle with high interest rates and worry about their personal wealth and savings,” said Ben Cahill, an energy security analyst at the Center for Strategic and International Studies. “Add it all up and it creates a bleak picture for oil demand. Prices are reflecting that.”
Also helping keep prices low at the moment are some key United States oil refineries, which returned to churning out gasoline after months of being out of commission for maintenance and repairs.
But just as big a factor is the current turmoil in China. As its leaders signal new COVID lockdowns are imminent, touching off protests throughout the country, the expected economic fallout has turned oil traders bearish.
China alone accounted for 16% of global oil demand last year, according to the research firm Capital Economics, which projects its purchase of oil will drop by 1 million barrels per day in December as COVID infections spread. The effect of such a drop on global oil markets is considerable, reducing the price of Brent crude by as much as $10 a barrel, or more than 10%.
“With COVID cases soaring to record highs in China and the threat of widespread lockdowns there increasing, the key question is how much demand could fall, freeing up supply for the rest of the world,” Edward Gardner, a commodities economist at the firm, wrote in a research note.
While the high cost of gasoline over much of the past year was a major factor in the crushing inflation that hit the United States and other countries, the current dip in fuel costs is doing little to return economic stability. Manufacturers that rely on large amounts of fuel need to see sustained low prices for a period of months before they adjust the costs of the products they sell, analysts say. Drivers in some parts of the country are benefiting significantly more than in others. Californians are still paying an average of almost $5 for a gallon of regular.
“This is a pretty delicately held-together price decline,” said Patrick De Haan, head of petroleum analysis at GasBuddy, noting that any number of geopolitical or economic events could send prices rebounding.
There are other big factors making the price outlook murky. The United States and Europe are in the process of negotiating a price cap on Russian oil, to take effect Monday. The plan is to allow Russian oil to continue to flow into global markets, but at prices that limit profits the Kremlin can use to sustain its war machine.
Such a price cap has never before been imposed on a major oil-producing nation, and it threatens to trigger further instability. If the cap is set very low, as some European nations are advocating, Moscow could retaliate by cutting off its supply, creating a surge in prices globally.
Another wild card is the OPEC Plus consortium of oil-producing nations, which meets next week to consider how much oil its members should continue to ship in the coming months. The group could decide to cut its output to drive prices up.
“The OPEC meeting could be the skunk at the picnic,” said Andrew Gross, a spokesman for AAA. “Trying to guess what they are going to do is tricky.”
Those are the kind of things that worry John Catsimatidis, who owns hundreds of gas stations and a refinery. But not because they could affect his fuel business. When the businessman talks about gas prices, he is more focused on what they could ultimately mean for another business in his multibillion-dollar empire, the one focused on developing real estate.
Spiraling borrowing costs have made that enterprise much more challenging. A six-month stretch of $3 gas, he said, could help ease inflation and signal that it’s safe for the Federal Reserve to reverse its recent rate hikes.
“If we get the price down and it stays there, we could fix the problem of inflation and the Fed can stop raising interest rates and putting everybody out of business,” Catsimatidis said.
One thing that is clear is that there is very little leaders in Washington can do to keep gas prices down. They are at the mercy of global markets.
The Biden administration is probably pressuring Saudi Arabia, which dominates OPEC Plus, not to cut its output. But the administration’s lack of influence over such things was clear the last time OPEC Plus met, in October, when the group snubbed Washington’s request that it boost output, instead cutting it by 2 million barrels per day.
The administration last week eased sanctions on Venezuela as part of a bid to get oil flowing from that country again. But it will be many months before Venezuelan petroleum is shipped, and only marginal amounts will be available initially.
Most drivers are paying little attention to the broader dynamics of the global oil market. But even they are taking a cautious approach, despite maybe splurging on holiday gifts.
Data collected by AAA suggests they are sticking with the conservation-minded driving habits embraced when gas soared past $5 a gallon, lumping more errands into single car trips, driving at slower speeds, only partially filling their gas tanks. Prices may have plunged, but drivers are not taking their foot off the brake.
That much is also clear in the outlook of consumers, which often improves when gas prices drop. But the University of Michigan Consumer Sentiment Index suggests this current stretch of cheaper gas is getting overshadowed by other financial challenges straining Americans. Even as gas prices dropped, the national survey shows, consumer anxiety grew in November.
“Even though prices of gas have come down, prices of other things are still high,” said Joanne Hsu, who directs the university’s surveys of consumers. “There is a feeling of tremendous uncertainty.”