If you've pumped gas lately then you're well aware that prices have been dropping. Gas hasn't cost this low since back in May 2009. It offers some relief for our wallets and the general consumer economy.
If you don't follow the world market, the current trend may be something of a pleasant surprise since the last few years we've seen gas prices increase at an alarming rate. However, if you take a closer look at why gas prices are going down it all begins to make a lot more sense.
The biggest reason gas prices are dropping is because the United States domestic production of crude oil has more than doubled over the past six years. Most of it is coming from the Gulf of Mexico, thanks to land based hydraulic fracturing, or "fracking." According to the US Energy Information Administration, America produced an average of 9 million barrels of crude oil daily in November 2014, which is a major increase from the 7 million produced daily in January 2013.
This means that the major oil suppliers from Saudi Arabia, Nigeria and Algeria who once sold quite a bit of oil to the US now have to find different buyers. It leaves them all competing in the same Asian markets, forcing a drop in prices thanks to the stiff competition.
Not to mention, the auto industry and consumers have made a shift to more energy-efficient vehicles and technology lessening the dependency on oil and gasoline. Since modern vehicles now require less fuel, it decreases the overall demand.
Another major factor of the current price drops in crude oil could be due to the fact that OPEC, the cartel of major oil producers, has not made any attempts to stabilize oil supply in markets that are oversaturated. OPEC has declined to cut production in certain markets with lower demand resulting in a price decrease of crude oil about 40 percent since they last met in November.
Other major oil producers including Iran, Venezuela and Algeria have tried to persuade the cartel to decrease production in an attempt to tighten up the falling prices. However, Saudi, the United Arab Emirates and other gulf allies refuse to alter production even slightly. In addition, Iraq is currently producing more oil than it has in the past.
Saudi in particular refuses to lower production because they claim that if the prices somehow begin to increase, it means they will lose market share and their foothold over competitors. Saudi officials have said they are alright with the dropping prices, and have even indicated they're willing to let them drop even more.
As the market stabilizes and demand begins to even out, the gas prices will increase once again. However, that may take some time if things continue the way they are now. That doesn't mean there are no outside elements that will influence gas prices.
One of the biggest causes of rising gas prices is natural disasters. Since the Gulf of Mexico is one of the largest suppliers of crude oil these days, it makes sense that a natural disaster like a hurricane could cause a great deal of harm. In August 2012, when Hurricane Isaac moved through the Gulf gasoline prices jumped considerably as the storm put a damper in production, causing a loss of more than 1.3 million barrels per day. In 2005, gas prices increased well over 46 cents in just a week after Hurricane Katrina hit land. Of course, we didn't really have any major hurricanes or storms moving through the Gulf in 2014, which meant the oil production market had a great year.
Gas prices will increase naturally as oil companies switch to summer blends. That's right, just like breweries, there are different blends of fuel depending on the current season. Traditionally, winter gasoline is the cheapest. Oil companies will continue to supply and produce this blend of gasoline until Spring. Then they'll switch over to a more seasonal blend for the warm months, resulting in a slight increase in prices. In case you're wondering, this happens because the government loosens slack on clean-air standards for oil refineries in September each year. This allows oil producers to create gasoline using cheaper hydrocarbons like butane.
Several Wall Street banks have predicted that oil prices will continue to plummet as low as $40 a barrel in coming months. But keep in mind that when prices dropped in 2008, publishers predicted it would continue to decline as well. Check out the infographic below on price of gas over the last decade to see the roller coaster ride it turned into.
Even though gas prices are going down you can still save at the pump by following these easy car tips in the infographic below.
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