Is gas cheap? The oil conundrum

Published: August 31, 2015

Updated: July 24, 2018

Author: Luke Jones

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The price of oil plays a major part in dictating world economy and the declining sales in the resource has led to an economic slowdown in Canada, with the dollar weakening as a result. However, while declining per barrel oil costs may spell bad news for the economy overall, it should benefit drivers who will pay less for their fuel.

Sadly, that simple logic does not apply as while oil prices are plummeting, gas prices are holding steady, which means drivers are paying almost as much as they always have to run their vehicles. That’s according to the American Automobile Association (AAA) as the body found earlier in August that oil prices are currently at a six year low, with the per barrel cost lower than it has been since 2009.

The average price of a gallon of gas in the United States sits at $2.595, the lowest summer ending price in 11 years, and the average is continuing to slip. The average in Canada at the time of writing is very similar to the United States as per barrel oil price is gauged in U.S. dollars (107.431 on $40.480 per barrel).

So what’s all the fuss about, gas prices are lower than they have been in 11 years for this time of year, so drivers are paying less. It’s the truth, they are, but not to the degree that they should be as there is currently a paradox between oil price and the cost of gas at the pumps.

During the last 11 years the AAA says that this is the only time that gas prices in the U.S. have stayed above $2 while the cost of a barrel of oil sits under $40. Crude prices have slipped for eight consecutive weeks, the longest slump in 29 years, so there has been plenty of time for the prices at the pump to better reflect the market cost of oil.

The good news is that the AAA says the price of gas for drivers is moving in the right direction and should fall under $2 by the start of winter. The problem is, winter is obviously a time when more oil is burned and rates could go up, so drivers may miss out on the deal that they should be getting in accordance to the current price of crude oil. The interesting question emerging from that is, are drivers propping up the struggling oil market by paying normal prices at the pumps?

PRESS RELEASE

(WASHINGTON, August 24, 2015) Average U.S. gas prices today are at the lowest levels for this time of year since 2004 due to the steep decline in the cost of crude oil. Gas prices have dropped recently despite ongoing refinery problems, and prices should continue to fall this autumn due to declining demand and the switchover to winter-blend gasoline. Today’s national average price of gas is $2.59 per gallon, which is eight cents less than a week ago and 84 cents less than a year ago. Pump prices are now 21 cents per gallon below the 2015 peak price reached on June 15.

BP’s largest crude distillation unit at its Whiting, Indiana refinery remains out of commission, due to a malfunction reported on August 8 that triggered dramatically higher prices in the Great Lakes region. Repairs to the unit are reported to be ongoing, and the company has yet to release a date they expect the unit to return to production. However, BP has purchased additional fuel supply and met all of its contractual requirements to date. Although regional supply is still uncertain due to the outage, prices in the region have moved lower over the past week as speculation has built that supply issues might not be as dire as first worried.

 

Motorists in the Pacific Northwest continue to pay the nation’s highest averages, with five of the six states with averages above $3 per gallon located in this region. California ($3.47) leads the market, and is followed by regional neighbors Alaska ($3.43), Nevada ($3.18), Hawaii ($3.17) and Washington ($3.04) as the nation’s most expensive markets for retail gasoline. Drivers in South Carolina ($2.11) are paying the lowest average at the pump.

Weekly price comparisons continue to reflect volatile fluctuations in the balance between regional supply and demand. Just a week after Midwestern drivers were reeling from sharply higher pump prices, motorists in these same states have seen prices plummet week-over-week: Indiana (-19 cents), Ohio (-19 cents), Michigan (-19 cents), and Illinois (-13 cents). Consumers in 30 states are experiencing weekly savings of at least a nickel per gallon at the pump and a total of seven states are posting double-digit savings over this same period. Prices in every state are lower today than one week ago.

Retail averages are down in 44 states and Washington, D.C. month-over-month. The largest discounts in the price of retail gasoline were in California (-36 cents) and New Jersey (-25 cents). Consumers in 33 states and Washington, D.C. are enjoying monthly savings of a dime or more per gallon at the pump. On the other end of the spectrum, retail averages have moved higher in six states over this same period. Prices are double-digits higher in five Midwestern states compared to one month ago: Indiana (+30 cents), Illinois (+26 cents), Michigan (+17 cents), Ohio (+16 cents), and Wisconsin (+16 cents).

 

Year-over-year discounts in the price of retail gasoline persist, largely due to the price of crude being significantly discounted from this date in 2014. Pump prices in nearly every state (48 and Washington, D.C.) are more than 50 cents per gallon lower than this same date last year. Motorists in 12 states are saving $1 or more per gallon in the average price to refuel their vehicles.

 

Crude oil prices have continued to sag, due to persisting global oversupply and concerns about the health of the Chinese economy. China is one of the world’s largest and most rapidly growing economies. Evidence of slower than projected growth in the Chinese economy is rippling through global markets and has put additional downward pressure on the price of crude. Both crude oil benchmarks (Brent and West Texas Intermediate) ended last week at their lowest levels since March 2009, and the market is expected to remain volatile in the near term. At the close of Friday’s formal trading on the NYMEX, WTI settled at its lowest close since March 2, 2009 down 87 cents at $40.45 per barrel. These losses accelerated today as WTI opened the week trading $1.50 per barrel lower, well below the $40 per barrel threshold.

 

Motorists can find current gas prices along their route with the free AAA Mobile app for iPhone, iPad and Android. The app can also be used to map a route, find discounts, book a hotel and access AAA roadside assistance. Learn more at AAA.com/mobile.