Explained: why gasoline prices are falling

US consumers are breathing a little easier now that gasoline prices have fallen from record highs, but pump prices are still high and the two-month decline may be coming to an end.

The national average price for a gallon of gasoline fell to $3.99 on Thursday, according to AAA. That’s down 20% from the mid-June high, and the first time the average has fallen below $4 since early March.

Gasoline prices generally rise and fall with the cost of oil, and crude has also fallen. The US benchmark price has fallen nearly a quarter since early June.

Other factors are also driving the energy price roller coaster this year.

WHAT IS HAPPENING?

Gasoline prices hit a record high of $5.02 on June 14. At the time, US crude was around $120 a barrel, and the international benchmark price was even a few dollars higher. Since then, however, oil prices have fallen.

Oil prices had been rising since April 2020 as economies around the world recovered from the shock of the pandemic and reopened – slowly at first, then faster. Energy demand has exceeded supply, pushing prices higher throughout 2021 and into the start of this year. Then, in late February, Russia’s invasion of Ukraine caused oil prices to spike, and they remained high until June — although not as high as in July 2008 if the inflation is taken into account.

WHY DOES THIS HAPPEN?

High energy prices contributed to inflation, which led the Federal Reserve and other central banks to raise interest rates. Concern has grown in recent weeks about the direction of the global economy.

A recession – or even slower growth – hurts energy demand and generally lowers oil prices. This is the scenario that oil investors now fear.

Even with lower prices, OPEC on Thursday lowered its global oil demand forecast for the rest of this year and next. The cartel based these expectations on the belief that economic growth in the United States, China and other key countries will be slower than expected.

ARE THERE OTHER FACTORS?

It is unusual for gasoline prices to drop during the summer, as this is the peak time for American motorists. Some analysts believe high prices have led drivers to cut back on spending, but the evidence is mostly anecdotal.

Some states have suspended their gasoline taxes, further reducing the final price at the pump, at least temporarily.

WHERE ARE GAS PRICES GOING?

Most analysts don’t think prices will rise in the near term unless something unexpected happens, like a big storm that shuts down oil production in the Gulf of Mexico or floods refineries along the US coast. gulf. It has happened before, and we are still in hurricane season.

Patrick De Haan, an analyst with GasBuddy, said this week that absent something like a hurricane, gasoline prices are expected to fall another 10 cents to 25 cents per gallon over the next two weeks.

Tom Kloza, analyst for the Oil Price Information Service, is a little less optimistic. He says the 58-day streak of falling average gasoline prices nationwide “may soon stumble.”

Besides the hurricane threat, Kloza says refineries – which have been running near full capacity – will have to take a break as they have delayed maintenance work and “this cannot be delayed indefinitely.”

WHAT ABOUT US OIL SUPPLY?

US oil production has not fully recovered to pre-pandemic levels; it is still down about 4.5% from 2019, according to the most recent government figures, for May.

President Joe Biden has ordered the release of US oil reserves. Kloza said “even Biden’s critics have to admit that releasing more than 150 million barrels of crude (strategic oil reserve) worked,” but he said it’s unclear what will happen when those releases will end later this year.

WHAT IS THE ROLE OF ENERGY IN INFLATION?

Higher energy and food prices were the main contributors to inflation. It also works the other way around. Lower gasoline prices in July helped slow the overall rate of inflation.

But gasoline prices in July were still 28% higher than a year earlier, which helped inflation climb to 8.5%.