Connecting the Dots to Lower Gas Prices

It’s often difficult to “connect the dots,” to show people how the global marketplace affects their daily lives. But plunging gasoline prices are giving Americans a first-hand lesson in the law of supply and demand.

The law of supply and demand holds that when a commodity is in short supply, the price of that commodity goes up. When the supply of that commodity increases, producers compete for market share by lowering their prices. As a result, consumers benefit.

That’s what happening with gas prices.

The price of gasoline has been dropping steadily over the summer, down to less than $3 a gallon in the Seattle area for the first time since 2010. At this writing, regular is selling for $2.74 a gallon in Tacoma, $2.89 in Spokane. Gasoline prices are dropping because the global price of crude oil is dropping. A barrel of crude is selling for around $80, down 20 percent since June.

That’s great news for us, because each 1-cent decline in the retail price of gasoline for a year amounts to $1.2 billion in savings for U.S. consumers, according to Chris Lafakis, Moody’s Analytics senior economist.

Lower energy prices are a stimulus for the entire economy. Manufacturers spend less to produce goods and distributors spend less to get them to market. And because consumers have more money in their pockets because they’re paying less for gas, they tend to spend that money on consumer goods, further stimulating the economy. A more vibrant economy makes it possible for businesses to create more jobs.

So, what’s driving down the cost of crude oil? We are.

Since 2004, U.S. oil production has increased 56 percent, the equivalent of pumping an extra 3.1 million barrels a day. Most of that is coming from fracking, a new technology that makes it possible to extract oil that wasn’t accessible before. At the same time, demand in Europe has declined as those countries continue to struggle with their sluggish economies – economies hobbled by excessive regulatory costs, high unemployment and expensive social programs.

“Weak global demand and the highest U.S. oil output in almost 30 years is keeping downward pressure on global oil prices, not to mention hurricanes have not been a problem this year in the Gulf of Mexico,” said AAA spokeswoman Jana Tidwell. “Barring any unforeseen circumstances, AAA expects gas prices could drop another 10 to 20 cents between now and end of the year.”

Usually, when crude oil prices drop, Saudi Arabia cuts back production to shore up prices, but not this time. Why?

One theory is that Saudi Arabia is maintaining production to hurt three of its adversaries: Russia, Iran and Venezuela. Those nations depend on oil revenues to sustain their economies and they need high oil prices to stay solvent. A sustained drop in crude oil prices could send their economies into freefall.

Another theory is that the Saudis are letting crude oil prices drop to harm America’s burgeoning fracking industry, which, because of the high-priced technology involved, needs prices of $70 to $80 a barrel to remain viable. Some analysts think the Saudis see America’s booming oil industry as a direct threat. U.S. producers say they’re okay for now, but are closely monitoring the situation.

So, while global economics and geopolitics seem rife with drama and hidden agendas, one thing is clear: The more oil America produces, the stronger our economy will be and the more power we will have to influence the world events that directly affect our nation’s security and our daily lives.