Gas prices are at a recent low, but how long will it last? The answer could have an large impact on both our pocket books and the overall economy—economists estimate that low prices over the last year have saved the average family $700 and allowed business to put $100 billion back into the economy. Gas prices depend on several factors, but by far the most important is the global supply and demand for crude oil.  

Indeed, the basic principals of supply and demand can explain the recent low prices of gas. High supply and low demand generally lead to lower prices for a given commodity. Back in the 2000’s, oil prices were rising rapidly. Demand for oil was low and supply was high. The extra supply accumulated over the years and is contributing to the low gas prices we see now. Currently, the economy is still down and the supply of oil, is high. 

Another source of increased oil supply is the booming American oil industry. The United States has been increasing its oil output each year for the past 7 years, largely through oil extracted by fracking. This extra supply of American oil has helped push global oil prices down.

According to the principals of supply and demand, if the supply is reduced (either through natural scarcity or by artificially limiting production) and the demand remains steady, prices will rise. Normally, when oil prices drop, oil-producing countries will reduce their output of oil (in other words, reduce the supply) so that that prices will stabilize. OPEC, The Organization of the Petroleum Exporting Countries, coordinates and unifies petroleum policies of its member countries to ensure market stability, a regular supply of petroleum, and a steady income to those producing it.  

Normally during a price drop, OPEC would reduce the supply of crude oil. However, Saudi Arabia, a key member of OPEC, is continuing to produce oil at the same rate, flooding the market with extra supply. Analysts believe Saudi Arabia is engaging in a price war. They have the natural resources to continue producing oil and the economic ability to absorb the impact of lower prices. By keeping supply high, they are allowing the price of oil fall in hopes of driving less stable competitors out of the industry. 

Another reason for declining oil prices, and in turn gas prices, is the recent lack of natural major disasters, like hurricanes along the Gulf of Mexico, in oil-producing regions. In 2012, after Hurricane Isaac pushed through the Gulf, the price of gas increased.

Some of our financial choices, like purchasing a car or deciding to go on a trip, depend on the price of gas. When gas prices go down and a consumer is on the market for a new car, they might decide to purchase a gas guzzler. Low gas prices might also cause commuters to stop carpooling and use more gas driving separate cars to work. So low prices can actually increase the demand for gas. As demand increases to meet supply, you can expect prices to go up.

Now that we know what makes gas prices rise and fall, when will gas prices rise again? Analysts predict that gas prices will stay low through the end of 2015. By then, some party will relent in the Saudi price war and supply will be reduced. Once supply goes down, prices should go up. According to an article in CBNC, former Shell (ADR) Oil President John Hofmeister believes gas prices will double by the end of the year, due to the surplus oil being depleted by consumers demand.  An article from Wall Street Journal agrees that low prices are eating up all the surplus oil production and stimulating demand but that prices are less expensive than they were this time last year. So while prices might rise over the coming months, they could still be lower in their perspective 2014 months.

The Bottom Line

While the rise and fall of gas prices are mostly controlled by supply and demand, reviewing the happenings of OPEC, knowing the economic outlook, being aware of natural disaster that could impede oil production can give consumers a good idea, in the future months, what to expect at the gas pump. 

 

 

 

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