Home Economy The cost of gas is dropping. Here’s why, and how long the lower prices might last.

The cost of gas is dropping. Here’s why, and how long the lower prices might last.

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With gas prices plummeting, it’s starting to put real money back in drivers’ pockets, defying previous predictions and offering a surprise gift for the holiday season.

Refueling is now as cheap as it was in February, just before Russia’s invasion of Ukraine triggered a global energy crisis. Reported by AAA With a national average price of $3.50 for a gallon on a normal Wednesday, gas price tracking company GasBuddy predicted that could be possible. get under $3 by ChristmasAnd all that reassurance probably helped the drive robust shopping Thanksgiving weekend.

“People are starting to realize that they might come back to spending $50 instead of $80 to fill up the tank,” said Emma Raziel, an economics professor at Duke University. That’s the main signal that consumers notice inflation: every week they need to refuel their cars, so what they’re likely to track is how much it went up or down.”

But Rasiel warned that cheap gas could also give consumers the wrong idea. Prices for other goods and services fluctuate much less, and there is no indication that this moment of more affordable fuel is driving down the cost of other things.

A plunge in prices at the pump would help spur national holiday shopping, but it financial burden Consumers and businesses around the world are facing it. Prices are falling as countries reduce demand for oil and gas as they prepare for a recession. coronavirus outbreak China threatens major financial turmoil and its drivers reduce gas guzzling They are trying to save money to cover burgeoning mortgage payments and stock market losses.

Sanctions on Russian oil cause supply shortages, raise the price Towards the end of the year, economic weakness and volatile financial markets gave way, at least for now.

“Europe is facing a deep recession as people struggle with high interest rates and worry about their personal wealth and savings,” said Ben Cahill, an energy security analyst at the Institute for Strategic and International Studies. and we are facing a further economic slowdown in the United States.” “All add up to a bleak outlook for oil demand. Prices reflect that.”

Also, the return of several major U.S. oil refineries to mass production of gasoline after months of shutdowns for maintenance and repairs has also helped keep prices low. .

But an equally big factor is the turmoil in China. The expected economic impact has left oil traders bearish as leaders signal an imminent coronavirus lockdown and protests erupt across the country.

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China alone accounted for 16% of global oil demand last year, according to research firm Capital Economics, and China’s oil purchases fell to 1 million barrels a day in December amid the coronavirus outbreak. We expect it to decrease. The impact of such a decline on the global oil market is This would drop the price of Brent crude by $10 a barrel, or more than 10%.

“With China’s record number of coronavirus cases and the threat of widespread lockdowns mounting, the key question is how much demand will fall,” said Edward Gardner, commodity economist at Capital Economics. , can we release supplies to other parts of the world,” wrote in a research note.

High gasoline prices over the past year have been a major factor in the overwhelming inflation that has ravaged the United States and other countries, but falling fuel prices have done little to stabilize the economy. Analysts say manufacturers that rely on large amounts of fuel will have to keep prices low for months before adjusting the cost of the products they sell. And drivers in some parts of the country have benefited significantly more than others. california I pay an average of nearly $5 for a gallon of regular fuel.

“This is a very carefully crafted price decline,” said Patrick De Haan, head of oil analysis at Gasbadi, adding that any number of geopolitical or economic events could push prices back. pointed out there is.

There are other big factors that cloud the price outlook.America and Europe price cap negotiation For Russian oil, it will come into force on Monday. The plan is to allow Russian oil to continue to flow into global markets, but at prices that limit the profits the Kremlin can use to sustain its war machine.

Such a price cap has never been imposed on a major oil producer and could lead to further destabilization. If the cap is set too low, as some European countries have argued, Moscow could retaliate by cutting off supply, causing a spike in prices globally.

Another wildcard is the OPEC Plus consortium of oil-producing countries. The consortium will meet next week to consider how much oil its members should continue to ship in the coming months. The group may decide to cut production to push up prices.

“OPEC meetings can be picnic skunks,” said AAA spokesman Andrew Gross.

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John Kachmatidis, who owns hundreds of gas stations and refineries, worries about these things, but not because they could affect his fuel business. When talking about, he focuses more on what it ultimately means for another business in his multi-billion dollar empire focused on real estate development.

Rising borrowing costs are making it even more difficult for the company. He said $3 gas lasting his six months could help moderate inflation and signal that it’s safe for the Fed to ease its recent rate hikes.

“If we keep prices down and stay there, we can solve the inflation problem and the Fed can stop raising rates and put everyone out of business,” Katsimatidis said.

One thing is clear: there is little Washington leaders can do to keep gas prices down. They are at the mercy of the global market.

The Biden administration is probably putting pressure on Saudi Arabia, which controls OPEC+, not to cut production. But when OPEC+ last met in October, the administration’s lack of leverage over such things was clear. The group ignored Washington’s demands for more production and instead cut production by 2 million barrels per day.

administration last week Easing Sanctions on Venezuela As part of a bid to get oil flowing again from the country. However, it will be many months before Venezuela’s oil can be shipped, and only small amounts will be available at first.

Most drivers pay little attention to the broader dynamics of the global oil market. But even they take a cautious approach.

According to data collected by AAA, people stuck with the thrifty driving habits they adopted when gasoline was over $5 a gallon, grouped more errands into one-car trips, and drove slower. , the gas tank is only partially filled. Prices may have plummeted, but drivers haven’t taken their foot off the brakes.

That’s also evident in consumer outlook, which often improves when gasoline prices fall. It is being overshadowed by challenges. Consumer anxiety rose in November despite lower gasoline prices, according to a national survey.

“Gas prices have come down, but the prices of other things are still high,” said Joan Hsu, who directs consumer research at the university. “There is a tremendous sense of uncertainty.”

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