Business basics: lower gas prices explained

September 24th, 2015


One year ago, the price for a gallon of gas at the Shell Station on the intersection of Cedar and Green roads was around $3.40.


Today, that same gas station is selling the same product for about $2.20.


What caused this one-dollar price drop of gasoline, after years of slowly rising prices? Will the low gasoline prices stay?


The answer is simple: supply and demand.


Gasoline is created from crude oil. Since crude oil is needed to create gas, the price of gasoline follows the price of oil, creating a direct relationship between them.


When oil is more expensive, gasoline increases in price and vice versa.


The production of oil has steadily increased in the United States over the past six years, due to the increased use of hydraulic fracturing, otherwise known as fracking.


The production of oil has also increased due to recent discoveries of new oil reservoirs, which makes the United States less dependent on foreign imports  for oil.


As a result, domestic prices are lowered, according to The Institute for Energy Research.


The foreign imports from countries such as Saudi Arabia and Nigeria, are forced to compete in other markets and have to lower their prices with the competition currently there.


Other major oil exporting countries have increased oil production, leading to a very large supply of crude oil in America and other countries.


As the supply of oil has increased, so has the supply of gasoline.


Demand for oil has decreased worldwide, due to a steady rise of energy-efficient vehicles, developed countries using less fossil fuel and the downturns of several economies.


European countries are simultaneously becoming greener while having weaker economies, leading to less consumption of oil.


China’s economic downturn also has a very significant impact on the lowered demand.


China is the largest consumer of commodities, including oil, in the world, but has lowered their consumption of these items due to their economic issues from their currency devaluation, The Business Insider reported.


The decline in demand for oil has directly created a decline in gasoline.


The price of gasoline is predicted to continue dropping through the rest of this year.


Cheaper blends of gasoline are created in the winter than in the summer, as well as the nation not driving as much in the winter than in the other seasons.


The Organization of Petroleum-Exporting Countries, otherwise known as OPEC, usually steps in to manipulate the lowering prices of oil by cutting production. However, in late 2014, the organization decided not to do so, allowing the global oil prices to continue dropping.


OPEC’s decision to not halt oil production may hurt Russia and Iran economically, according to The Guardian.


Officials from Saudi Arabia, an OPEC country, have said if they end production, the prices will go up and they will consequently lose their market share.


With the continuing production of oil in the United States and the annual decrease in demand in the winter months, we can expect the price of gasoline to keep on steadily falling through the end of the year.


Editor’s Note: Information from, The Institute for Energy Research, The Business Insider and The Guardian was used in this report.