How Low Can Gas Prices Go? $1.75, Expert Says

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Close up of a customer's hand pumping fuel into car's gas tank.
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Gas prices have hit their lowest levels since April 2009, according to Reuters. As of a Jan. 9 survey, the average price for regular gasoline was at $2.20 a gallon. That's down $1.14 from the same time last year -- and dropping.

How low the price at the pump could go? According to Carl Larry, an energy consultant at market research firm Frost & Sullivan, about $1.75. To understand the answer, it's necessary to know something about the market dynamics.

Gasoline prices are down because crude oil costs have plummeted. Gasoline is made of petroleum, and when the fundamental component drops in price, so will the byproduct. If some producers tried to maintain higher prices, others would drop their price to attract more customers, and the law of supply and demand would take hold.

The Oil Price Two-fer

But the drop in oil prices is a reaction to a number of factors. One is that Europe still hasn't pulled out of its recession. "That's causing the foreign price of oil go down," Larry told DailyFinance, because slow economic activity means less demand for oil and, so, lower prices under that law of supply and demand.

The U.S. isn't under the same economic pressures, but oil is a global market. "American crude price follows global prices," Larry said. "If the global price is dropping, so is [U.S.] crude."

Then there is a second factor: U.S. domestic energy production. "We've nearly doubled our production of US crude oil," Larry said. Although the country still imports millions of barrels of oil a day, it has replaced roughly 4.5 million of them, which means more supply on global markets and, therefore, lower prices. "So long as the U.S. is producing 9 million or more barrels a day, you're not going to see $100 a barrel for quite a long time," meaning close to five years, he said.

In addition, American oil is "the best oil you can use to make gasoline," according to Larry, and increased production of natural gas has replaced a significant amount of oil use in energy generation, so there's more oil to turn into gas.

"Prior to 2013, we imported 900,000 barrels a day, 1 million barrels a day of gas," he said. Now gasoline imports are at 500,000 barrels a day, which is the lowest level since 1999, vs. the peak of 1.3 million barrels a day in 2007. And domestic gas consumption has dropped. Again, supply and demand says this affects gasoline prices, making lower prices at the pump more competitive.

What Goes Down Comes Back Up

But while the price of gas is still dropping, there is only so far it can practically fall. The lower prices have convinced consumers that they can afford to drive more, and sales of larger, less gas-efficient vehicles, have been rising, as Fortune has reported.

"The low gasoline prices are increasing demand," Larry said. "At this price level, we see the consumer saying this is a great deal and I'm going to go out and drive more."

That means the other part of supply and demand will kick in, putting a brake on how far pump prices can fall. As unemployment goes down, demand will also increase as more people travel to work.

As DailyFinance has reported, low prices could also tempt politicians to raise gasoline taxes as a revenue boost.

Larry thinks that the combination of increasing demand and additional taxes means that gas is unlikely to drop below $1.75 because, at that point, these factors will counterbalance falling prices and create a floor for consumer expectations. It's already close. In a nationwide survey, Forbes on Dec. 15 found one Ohio station at $1.85.
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