Gas prices are at their lowest levels in four years and the slide is expected to continue.
The ongoing drop of gas prices in the U.S. is confounding experts, delighting consumers and being ignored by U.S. fracking companies, which are helping to push U.S. oil production to record levels.
The average price at the pump dropped 18 cents in the past two weeks. Gas prices are now at their lowest level in nearly four years, thanks to a steep drop in oil prices, according to the latest Lundberg survey released on Sunday.
Prices fell to an average of $3.08 per gallon for regular grade gasoline, according to the survey conducted on Oct. 24, the lowest price since Dec. 2010. In some markets, the price of gasoline has now fallen below $3 per barrel. In northern Virginia, for example, the price of gasoline had dropped to $2.72 per gallon.
According to the U.S. Energy Information Administration, the average price of gasoline across the country had dipped to $3.299 on Oct. 6.
The drop in oil and gasoline prices has surprised many observers and has also been blamed for some if not much of the tumult on Wall Street this month as traders and hedge funds had bet the price of oil would begin to rise as colder weather set in the Northern Hemisphere.
One bit of conventional wisdom is that the drop in crude prices is a symptom of the weakening global economy particularly in Europe, China, where growth is running at only 7.2%, and Japan, which so far has been unable to climb out of global recession.
Observers also have been surprised by the decision of Saudi Arabia to continue to pump oil despite the drop in global prices. One theory is that the Saudi have decided to launch a price war in an attempt to slow investment in fracking in North America.
The Saudis “will accept a price decline necessary to sweat whatever supply cuts are needed to balance the market out of the U.S. shale oil sector,” Robert McNally, a White House adviser to former President George W. Bush and president of the Rapidan Group energy consultancy, has advised his clients.
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The Saudis still have the world’s cheapest production costs, while oil recovered through fracking costs anywhere from $40 per barrel to $60 per barrel, which leaves it somewhat vulnerable to pricing pressures that threaten profit margins.
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So far the impact of lower prices has been minimal and the U.S. is on track to produce a record amount of petroleum this year. Additionally, there is a substantial campaign underway to allow American producers to export oil for the first time in more than 40 years.
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The drop in gasoline prices also has had an impact on new car sales as consumers has shown a distinct preference for trucks and sport utility vehicles in recent months. The EPA this month noted that U.S. motor vehicle fuel economy hit an all-time record last year, while cautioning that the gains appeared to be slowing. A separate report by the University of Michigan Transportation Research Institute, or UMTRI, indicated the fuel economy of vehicles sold in recent months had dipped sharply as truck sales surged.