Why Have Gas Prices Been Falling

Picture taken Thursday morning (Oct. 16)

By Kyle Quick

NEW HAVEN, Mo. - Thursday morning I had posted the photo above on our Facebook page because I along with almost everyone else was shocked by the drastic drop in grass prices.  I possessed the question as to the reason behind grass prices dropping and like myself most people were unsure of the reason.

The most common reason people speculated was because of the up coming November elections and with many others interested in the actual cause I’ve done some digging to try and understand why the national average for a galloon of gas is the lowest since October 2010 at $2.67.

Missouri has consistently remained below the national average by 20 to 30 cents and according to grasbuddy.com as of today (Oct. 19) Missouri has the lowest average cost per gallon of $2.79.

But the questions still remains as to why the sudden nationwide drop.  Ironically based on all my research the decrease in gas prices has not been associated with the upcoming November elections.  However, like the vast majority of Americans I still remain skeptical.

According to American Automobile Association (AAA) there are four contributing factors that have caused the drop of prices at the pump.

AAA says that four major factors are combining to bring down the retail price of gasoline. We're using less, we're producing more, our money goes farther and seasonal factors are kicking in at just the right time.

Falling demand

Since the Great Recession, Americans have been using less gasoline. At first it was attributed to the weakness of the economy, but as the economy has slowly recovered, consumers still aren't using as much gasoline as before.

Reduced demand – in part because of more efficient cars and trucks – appears to be not just a response to an economic calamity but part of a long-term trend. The average fuel economy of new vehicles sold in the U.S. in August was at a record high of 25.8 mpg -- up 0.2 mpg from the value in July. Vehicle fuel economy is up 5.7 mpg since October 2007.

The “Shale revolution”

Meanwhile, the U.S. is swimming in oil, thanks to the shale revolution. U.S. producers continue to find and refine more oil, reducing the need to import more expensive Brent crude oil, which serves as a major benchmark price for purchases of oil worldwide.

With plenty of oil at its disposal, U.S. refineries are operating at about 93% capacity, maintaining about a 23-day supply of gasoline at all times. Throughout August, the U.S. had gasoline stockpiles of between 210 million and 213 million barrels.

Stronger US dollar

A third factor leading to lower gasoline prices – indirectly at least – is a strengthening U.S. dollar. Since oil is priced in dollars, the more valuable the currency the lower the price of the things it will buy.

While a strong dollar hurts American exports, since U.S. products will cost more in foreign markets, it helps consumers who buy imported products, like oil. The Dollar Index, meanwhile, is sitting near its highest levels of the year after a big run-up over the summer.

Lower costs

Finally, the seasonal switch from summer blend gasoline to winter blend is providing some relief at the gas pump. Producing a winter grade gasoline costs less than producing the fuel we use in summer. So the price falls.

Because of this seasonal factor, AAA expects the national price of gasoline could drop as much as another 20 cents per gallon by the end of October.

“The big crunch in summer travel is done and most of us can look forward to lower gas prices during the next few months,” said Avery Ash, AAA spokesman. “If we can get through September without any major refinery or overseas problems, we should see more gas stations drop below $3.00 per gallon this fall.”

While drivers are excited lower gas prices, looking at what drivers were paying 11 years ago, the current price will probably not sound so cheap.

In March of 2004 the average price per galloon in Missouri was $1.26 and then after prices hit all time highs nearing $4 per galloon in May of 2007, prices plummeted in February of 2008 to nearly $1.30 per galloon. (Data collected from gasbuddy.com)

The chart below was generated through gasbuddy.com showing the average price per gas over the past two years, comparing the national average to the average cost for Missourians.

All data unless otherwise noted was collected through American Automobile Association.