Large supplies and weak demand leave values low
So far in 2016, a gallon of gas has cost less than a gallon of milk—by a buck or more.
Looking forward, low prices should continue. Regular gasoline is expected to average $2.03 per gallon in 2016 and $2.21 per gallon in 2017, according to the U.S. Energy Information Administration. That compares to averages of $2.43 per gallon in 2015 and $3.36 in 2014.
The first driver keeping gasoline prices down is reduced crude oil prices, since prices of gasoline and crude oil move closely together with a correlation of 95% or higher.
“Crude oil prices are hovering around $30 per barrel, which is quite low,” says Jarrett Whistance, program leader for biofuel markets and policy analysis at the Food and Agricultural Policy Research Institute at the University of Missouri. In 2015, the average per-barrel price was $49 and in 2014 it was $93.
Crude oil infrastructure came online in recent years based on $100-per-barrel oil prices, says Wally Tyner, Purdue University energy economist. Yet even with today’s lower crude oil prices, production has not significantly slowed.
“Once you’ve made all those investments, you can still produce it for $30 a barrel,” he says. “It’s cheaper to produce it and cover the variable costs than shut down.”
Continuous production has caused a supply glut. Current crude oil inventory is 502 million barrels, compared to a normal inventory of 350 million barrels, Tyner says.
Meanwhile, global demand for crude oil and gasoline is shrinking with weak economies in places such as Europe, China, Brazil and Russia.
“The U.S. is still growing and looking decent, but that’s not enough to support crude and gas prices,” Tyner says.
As of Feb. 1, regular U.S. gasoline prices averaged $1.82 per gallon, a low level not seen since January 2009.