Why Gas Could Plunge Below $2 a Gallon This Summer

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Gas Prices Michigan
David N. Goodman/APSome areas of the country have already seen gas prices fall below $2 a gallon, including Detroit in January.
The price of gasoline has plunged 30 percent in the past year to $2.45 a gallon nationwide, giving major relief to American consumers. Plunging oil prices have driven the drop and have given a reprieve to consumers who have been paying nearly $4 a gallon for gas for most of the past four years.

But the discount on gasoline may not be over. Just as the summer driving season approaches, drivers may get another reprieve. This time, the oil boom that is driving the U.S. toward energy independence could backfire and provide a massive discount on gas for consumers. Within a few months, we may be below $2 a gallon again.

Nowhere for All That Oil to Go

The latest problem for the oil industry is that there's nowhere for all of the country's oil to go. In 2014, the industry pumped 8.7 million barrels a day, and despite low oil prices the U.S. Energy Information Administration is expecting production to increase to 9.3 million barrels a day in 2015 and 9.6 million barrels in 2016.

Problem is, they're running out of places to put all that oil. Between February 2014 and February of this year, total oil storage capacity utilization has risen from 48 to 60 percent, and in the few weeks since the EIA's data came out, another 15 million barrels have flowed into U.S. storage tanks, causing inventory to reach an 80-year high.

Source: U.S. Energy Information Administration
Take your own energy situation as an example. You might be willing to pay a premium for gasoline if your tank is near empty and there's not a gas station for miles, but if your tank is full and you're sitting at a gas station, what would you pay for a gallon of gas you can't fit in your car?

That's essentially the problem the U.S. oil industry could face as we head into summer. The coffers are full of oil and more is coming every day. Unless something changes soon, the price of oil could plunge further as a result.

How Low Could Oil Go?

The estimates on how low oil prices will get in the U.S. are getting crazy. Goldman Sachs President Gary Cohn told CNBC earlier this month that crude oil prices could fall to $30 a barrel. Raoul Pal of The Global Macro Investors newsletter told CNBC that same week that prices could fall to $20 a barrel based on economic weakness in China and Europe as well as increased supply in the U.S.

No one knows how low oil prices can go, but predictions are that it will fall significantly in the next few months. If $20 or $30 a barrel is where it settles, gasoline prices could easily fall to $1.50 a gallon, a level we haven't seen since the early 2000s.

Savings Pile Up for American Consumers

Late last year, I wrote about the EIA's prediction that falling gas prices could save the average consumer $550 in 2015. Back then, gasoline was $2.61 a gallon, so that estimate may have been low.

If gasoline prices fall below $2 a gallon and even toward $1.50 a gallon, the savings will pile up for American consumers. The U.S. consumes about 375 million gallons of gasoline every day, so just a penny's drop in the price of gasoline means $3.75 million could be spent somewhere else in the economy every single day.

As we approach summer, the savings at the gas tank could add up to billions of dollars for American consumers. That's a lot of spare change.

Travis Hoium is a Motley Fool contributor. Try any of our Foolish newsletter services free for 30 days. Check out The Motley Fool's one great stock to buy for 2015 and beyond.
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