Gas prices drop below $3 a gallon. That hasn’t happened in four years

Gas prices have fallen to the lowest levels since December 2010. Cheap prices at the pump are the result of a glut of oil in the global market, which has driven crude oil prices down significantly over the last several months. 

US average gas prices dipped below $3 a gallon for the first time in nearly four years Saturday, according to automotive group AAA, and signs suggest prices could drop further. At $2.995 a gallon, Saturday's national gas prices average was just a hair below the $3 threshold, breaking a 1,409-day streak of prices above $3.

Prices at the pump have been falling consistently for most of a year, driven by a dramatic 25 percent drop in crude oil prices over the last 5 months. Oil prices are plummeting for a slew of reasons, ranging from cartel manipulation to a strong US dollar. But at its root, the falling price of crude – which determines the price of gasoline – is about supply and demand.

“In very broad terms, global production has outpaced consumer demand,” says Gregg Laskoski, senior petroleum analyst at GasBuddy.com, a website that tracks gas prices nationwide. “And that’s not just in the US; it’s in Europe and emerging markets, too.”

Booming US production and robust output from Libya, Nigeria, and Iraq have created a glut of supply. And with lackluster demand for oil in Asia and Europe, motorists are benefiting from lower prices. Those cheap gas prices will continue – and drop further – if crude prices push well below the $80 a barrel mark, where they’re currently hovering. That is an increasingly likely prospect, according to Mr. Laskoski.

“In crude oil prices, there seems to be more downward momentum than upward momentum,” Laskoski says in a telephone interview Friday.

But if prices get too low, it could threaten the economics of the US shale boom. Expensive and technically-difficult shale drilling – which has underwritten the US boom over the last several years – requires high oil prices to turn a profit.

In the meantime, though, low gas prices are an undeniable boon to US motorists.

“The steep decline in gas prices has helped to make driving less expensive for the vast majority of Americans who use their car every day,” Bob Darbelnet, CEO of automotive group AAA, said in a statement. “Many Americans are spending $10-$20 less to fill up the cars on every trip to the gas station compared to what they paid during the summer driving season.”

 

Part of the reason prices are so low currently is cyclical – every year gas prices tend to dip in November in December.

“In a typical year, prices are low in January, reach a high in April or May, and drop after May,” says Michael Green, a AAA spokesman. “Then prices go up in July and August, and in September prices can be high at the beginning.”

The perennial up and down is the result of several factors. Demand is lower in the winter months when rough weather discourages driving, pushing down the price of gas. In the summer, demand is higher, but production is also steady – that’s because refineries perform their tune-ups in the spring and fall, making the supply-side shaky during those seasons.

Hurricanes can slow gasoline production in the late summer and early fall. But after hurricane season ends and as refineries finish up their fall repairs, gas prices trend downward.

“Prices generally continue to fall until November or December, when we hit a low for the year,” Mr. Green says in a telephone interview Thursday.

And that’s where we’re headed now, Laskoski says, with the ultimate low dependent on how low oil prices get in the coming weeks and months.

Low prices aren’t good news across the board, though.

“In states where the economies are especially dependent on energy production, if crude oil prices go too low you can reach a point where shale production may not be warranted,” Laskoski says.

States like Louisiana, Oklahoma, Texas, and North Dakota rely on high oil prices to make drilling profitable. As prices fall, the economics of drilling there become weaker.

The last time gas prices were at $3 a gallon was nearly four years ago, in December of 2010. Toronto had just elected a new mayor – Rob Ford – and the US unemployment rate was at 9.8 percent. (The unemployment rate is currently 5.9 percent; and, after Mr. Ford’s controversial and tumultuous term in office, Toronto has a new mayor.)