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Falling Gasoline Prices: There Are Lots of Reasons Why

Plummeting gasoline prices are the result of lagging economic growth in many parts of the world, the end of the summer driving season, less expensive winter gasoline and well-functioning Midwest refineries, Purdue University energy economist Wally Tyner says.

There’s both good news and potentially bad news in all of that.

“Lower energy costs are like a tax cut,” Tyner said, “meaning they give us more money to spend on other things, so the economy can be stimulated. However, the prices are lower in part because global demand has fallen, which means that there is less demand for the goods and services we export, which drags the economy down.

“Thus, the immediate effect is more disposable income for consumers, but longer term, that may be at least partially offset by reduced exports.”

Tyner noted that the price of crude oil has fallen by more than $20 per barrel since the summer. It is currently about $84. He said gasoline prices fall by an average of 2.5 cents for every dollar that the price of crude oil falls. A drop of $20 in crude oil represents 50 cents at the pump.

Crude oil prices are dropping because of slow economic growth in Europe, China and many other parts of the world.

“Even the U.S. is growing slower than expected,” Tyner said.

The slow growth around the world means less demand for the gasoline that the U.S. exports, lowering prices here in return, he said.

In addition, demand for gasoline typically drops off after the summer, a time when people are out and about, using cars on vacations and other outings. Less demand results in lower prices.

Also contributing to falling crude oil prices, Tyner said, are abundant supplies from the dramatic increase in U.S. production of oil from shale and the return of Libya to the world market.

The industry’s switch from summer to winter gasoline also has provided some relief at the pump, normally at least 5 cents a gallon, Tyner said.

Tyner pointed out that Midwest gasoline prices historically have been a bit higher than the national average. But since early summer that has not been the case.

“Midwest refineries are all functioning well,” he said. He noted that the refinery in Whiting, Indiana – the largest in the region – uses heavy crude such as Canadian oil sands crude, which is less expensive than lighter crudes.

Tyner said the prospects look good for prices at the pump to stay around current levels, at least in the short term.

“However, no doubt we will have ups and downs because of world events or refining problems,” he said. “But they are not likely to fall much more because the expensive oil cannot be produced if crude falls further.”

Source: Purdue University 

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