4 factors that could determine if gas prices will keep falling

A customer fuels up at a Shell gas station in Hercules, California, in June. | David Paul Morris/Bloomberg via Getty Images

Gas prices are now averaging $4.41 a gallon across the country, down from last month’s peak of more than $5 a gallon.

Drivers have seen it at the pump, and Biden administration officials have repeatedly touted it in recent days: Gas prices are dropping, and they have been for weeks.

Although the decline in prices is a welcome reprieve for Americans whose budgets have been strained by higher costs for nearly everything, it’s reasonable to ask: Will this last?

Gas prices are averaging $4.41 a gallon across the country as of July 22, according to the American Automobile Association, down from last month’s peak of more than $5 a gallon. Although gas prices have been falling for more than 30 days straight, the national average is still substantially higher than a year ago, when prices averaged $3.16 a gallon, according to AAA data. Diesel prices are also averaging $5.46 a gallon as of July 22, down from $5.81 a month ago.

Rising gas prices have been a major driver of inflation. A government report released last week showed that an increase in energy prices fueled a big jump in inflation in June, when the Consumer Price Index rose 9.1 percent from a year earlier, a new four-decade high. Gas prices soared after demand for oil rebounded from pandemic lows and Russia’s invasion of Ukraine drove up oil prices.

Several factors have pushed gas prices down, including a drop in oil prices as recession fears grow and a smaller-than-expected impact from Western sanctions on Russia. Supply has also improved relative to demand, which has slightly fallen in recent weeks and remains at levels lower than a year ago, according to data from the US Energy Information Administration.

Biden administration officials have been quick to claim the decline in prices as a success and predicted that prices will continue ticking down, although they note that risks remain. Jared Bernstein, a member of the White House Council of Economic Advisers, said the drop in retail gas prices was “not a daily blip.”

“We think it’s reasonable to expect more gas stations to lower their prices in response to lower input costs and thus, barring unforeseen market disruptions, to see average prices fall below $4 per gallon in more places in coming weeks,” Bernstein said at a White House press briefing on Monday. He also pointed to actions the administration has taken to address the rising costs, such as releasing millions of barrels from the nation’s Strategic Petroleum Reserve.

Amos Hochstein, a State Department senior adviser for energy security, also said on CBS’s Face the Nation on Sunday that he was expecting average national gas prices to continue to decline closer to $4 a gallon.

But energy prices are highly volatile, making it difficult to make any predictions. Energy analysts and economists say it’s probably too soon to say whether prices will continue to fall in the coming months, and there are reasons to believe the downturn might not last.

“It’s helpful that prices are coming down, but I wouldn’t run a victory lap yet,” said Abhi Rajendran, the director of research at Energy Intelligence.

Here are four factors that could affect gas prices in the coming months.

1) How people (especially investors) feel about the economy as a whole

A big reason that oil prices have dropped is because investors have grown more worried about a potential recession in the United States and a global economic downturn.

Anticipation of future demand is a key driver of oil prices, said Christopher Knittel, a professor of energy economics at MIT. Recession concerns have led to a slump in the crude oil market, resulting in a drop in retail gas prices.

One of the biggest factors to watch is the strength of the US economy. Fears of a recession have risen as the Federal Reserve continues to aggressively hike interest rates to get inflation under control. By making borrowing more expensive, the central bank is hoping to dampen consumer demand for goods and services, which should help prices fall.

But the Fed risks going too far with its policy moves, potentially triggering a recession as consumers pull back spending and economic growth takes a downturn.

“If markets think there’s going to be a recession next year, that starts to move oil prices today, even though demand will fall next year,” Knittel said.

Investors will be watching indicators like next week’s gross domestic product report, which will show whether the US economy contracted or expanded in the second quarter, said Omair Sharif, founder of the research firm Inflation Insights. (Two quarters of declining GDP growth is a common rule of thumb for determining when the US is in a recession, although there are complicating factors.) They’ll also be watching for changes in consumer spending, Sharif said. If spending shows signs of decreasing by more than expected amounts, that could worsen recession fears and lead to lower gas prices.

Investors will also be monitoring the Fed’s policy meeting next week, Sharif said, when central bank officials are expected to announce another interest rate increase of 0.75 percentage points. Investors will be paying close attention to Federal Reserve Chair Jerome Powell’s comments about how aggressive the central bank’s interest rate hikes will be in the coming months. If bigger rate hikes are in store, that could worsen fears of a recession on Wall Street.

“You probably sell off on oil and other commodities,” Sharif said, “which could lower gasoline prices.”

2) The effect of sanctions on Russian oil

So far, sanctions on Russian oil have had less of an impact on global supply than originally expected, since Russia has been able to export discounted oil to countries like China and India. Still, European sanctions could further strain the already tight global oil supply in the coming months.

In December, the European Union will fully ban Russian maritime deliveries of crude oil, and in February, the EU will ban shipments of refined oil products from Russia. By the end of the year, the embargo will apply to 90 percent of the bloc’s Russian oil imports. An insurance ban on ships carrying Russian oil will also be phased in, making it more difficult for Russia to export oil products around the world.

Oil prices could rise because of these tightening sanctions, said Kevin Book, a managing director at ClearView Energy Partners. “You could start to see a race to procure barrels if folks think that perhaps that’s going to be a real deterrent to the world supply,” Book said.

3) The weather on the Gulf Coast

The National Weather Service predicted this year’s hurricane season would be more active than usual. So far, it’s produced three named tropical storms, fewer than last year’s. But it’s still early, and at any time, a hurricane along the Gulf Coast could knock out a refinery, the processing plants that turn oil into petroleum products like gasoline and diesel.

Tom Kloza, the global head of energy analysis at the Oil Price Information Service, predicted that gas prices would continue to fall through the weekend, but said that any signs of a storm forming along the Gulf Coast could threaten refineries and jeopardize that trend.

That could be “devastating for supply” and potentially push up fuel prices higher than last month’s $5-a-gallon peak, he said.

“I don’t think this is a big downtrend that’s going to persist,” Kloza said. “I think we may have another act.”

4) Demand for gas in the US

People drive more in the summer, so Rajendran, the Energy Intelligence director, said it was more likely for prices to climb rather than drop between now and Labor Day. He said it’s also possible for falling gas prices to increase demand, which could push up prices again.

Although some regions of the country are already seeing gas prices fall below $4 a gallon, Rajendran predicted that the average national gas price would likely drift to higher than $4.50 before tapering off and reaching $4 a gallon or below by the end of the year as demand subsides.

Patrick De Haan, the head of petroleum analysis at GasBuddy, said national gas prices could fall below $4 a gallon in mid-August if gas demand doesn’t surge, the country avoids a major hurricane, and the economy continues to show signs of cooling. But De Haan said costs could spike again if the country gets better-than-expected economic data in the coming weeks, spurring a rally. And consumers hoping to see gas prices averaging anywhere between $2.75 and $3.25 a gallon again could be waiting a while, he said.

“Americans have seen five weeks straight of falling gas prices, but that does not mean we are yet in the clear,” De Haan said. “I don’t think we’ll get back down to what most Americans consider normal for gasoline prices until there’s some sort of resolution between Russia and Ukraine.”

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