The cost of gas is dropping. Here’s why, and how long the lower prices might last.

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The price of gasoline is falling so fast that it is starting to put real money in drivers’ pockets, defying previous forecasts and offering an unexpected holiday gift.

Refueling is now as cheap as it was in February, just before Russia’s invasion of Ukraine triggered the global energy crisis. AAA reported that the national average for a gallon of regular Wednesday was $3.50, and gas price tracking company GasBuddy predicted it could fall below $3 by Christmas. And all that relief probably helped fuel Thanksgiving weekend shopping.

“People are realizing that they could go back to $50 to fill their tank instead of $80,” said Duke University economics professor Emma Rasiel. “This is the main signal that consumers pick up on inflation. That’s one thing they’re likely to track is how much it’s gone up or down because they have to fill up their car every week.

But Rasiel warned that cheaper gas could also give consumers the wrong idea. The prices of other goods and services are much less volatile, and there is no indication that this moment of cheaper fuel will lower the cost of other things.

Even as the drop in prices at the pump helps boost holiday shopping, it reflects the financial strain facing consumers and businesses around the world. Prices fall as demand for oil and gas falls as countries brace for recession and coronavirus outbreaks China is facing major financial disruption, and drivers are cutting back on gas as they try to save money to cover soaring mortgage payments and stock market losses.

Earlier concerns that sanctions against Russian oil would lead to supply shortages and higher prices at the end of the year have given way, at least for now, to struggling economies and troubled financial markets.

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“We’re headed for a serious recession in Europe and a further slowdown in the U.S. as people struggle with high interest rates and worry about their personal wealth and savings,” said Ben Cahill, energy security analyst at the Center for Strategic and International Studies. . “Adding it all up paints a bleak picture for oil demand. The prices reflect that.”

Currently low prices are also helping to keep some major U.S. refineries pumping gasoline again after months of maintenance and repair services.

But just as big a factor is the turmoil in China. As its leaders signal a new coronavirus lockdown is imminent, sparking protests across the country, the expected economic fallout has left oil traders bearish.

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China alone accounted for 16 percent of global oil demand last year, according to research firm Capital Economics, which expects its oil purchases to fall by 1 million barrels a day in December as coronavirus infections spread. The impact of such a drop on world oil markets is significantly, reducing the price of Brent crude oil by as much as 10 dollars per barrel, or more than 10 percent.

“With the number of COVID cases in China rising to a record high and the threat of a widespread lockdown rising, the key question is how much demand could fall, freeing up supply for the rest of the world,” said Edward Gardner, commodities economist at Capital Economics. wrote in a research note.

While high gasoline prices over the past year have been a major factor behind the inflation that has hit the U.S. and other countries, falling fuel costs are doing little to stabilize the economy. Analysts say producers that rely on large quantities of fuel need to see months of persistently low prices before they adjust their costs of goods sold. And drivers in some parts of the country benefit significantly more than others. Californians still pay an average of nearly $5 per gallon of regular.

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“It’s a pretty delicately contained decline in prices,” said Patrick De Haan, head of oil analysis at GasBuddy, noting that any number of geopolitical or economic events could trigger a recovery in prices.

There are other big factors clouding the price outlook. The US and Europe are negotiating a cap on Russian oil prices, which will take effect on Monday. The plan would allow Russian oil to continue flowing into global markets, but at prices that limit the profits the Kremlin can use to fuel its war machine.

Such a price cap has never been imposed on a major oil-producing country and threatens to cause further instability. If the cap is set very low, as supported by some European countries, Moscow could retaliate by cutting off supplies, sending prices up around the world.

Another wild card is the OPEC Plus consortium, which meets next week to consider how much oil its members should keep supplying in the coming months. The group could decide to cut production to raise prices.

“The OPEC meeting could be a picnic skunk,” said Andrew Gross, a spokesman for AAA. “Trying to guess what they’re going to do is difficult.”

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These are the things that worry John Katsimatidis, who owns hundreds of gas stations and refineries, but not because they might affect his fuel business. When the businessman talks about gas prices, he’s more focused on what they could ultimately mean for another business in his multibillion-dollar real estate development empire.

Rising borrowing costs have made this venture much more difficult. He said a six-month stretch of $3 gas could help dampen inflation and signal that it is safe for the Federal Reserve to ease recent rate hikes.

“If we lower the price and it stays there, we could solve the inflation problem and the Fed can stop raising interest rates and shut everything down,” Catsimatidis said.

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One thing that is clear is that there is little Washington can do to lower gas prices. They are at the mercy of world markets.

The Biden administration may be pressuring Saudi Arabia, which dominates OPEC Plus, not to cut its output. But the administration’s lack of influence over such matters was clear at the last OPEC Plus meeting, in October, when the group rejected Washington’s demand to increase output, instead cutting it by 2 million barrels a day.

The administration eased sanctions on Venezuela last week in an effort to get oil flowing again from the country. But it will be many months before Venezuela’s oil is shipped, and initially only small quantities will be available.

Most drivers pay little attention to the broader dynamics of the global oil market. But even they are treading cautiously, despite the fact that they may be splurging on holiday gifts.

Data compiled by AAA shows they are sticking to the conservative driving habits they adopted when gas prices rose above $5 a gallon, packing more errands into one-car trips, driving at slower speeds and only partially filling their gas tanks. Prices may have fallen, but drivers are not taking their foot off the brake.

This is also evident in the consumer outlook, which often improves when gas prices fall. But the University of Michigan’s Consumer Sentiment Index shows that part of cheaper gas is overshadowed by other financial challenges weighing on Americans. Even as gas prices fell, a national survey showed, consumer concerns rose in November.

“While gas prices have come down, prices for other things are still high,” said Joanne Hsu, who directs the university’s consumer surveys. “There is a huge sense of uncertainty.”


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