How Low Will Gas Prices Go?

Posted: August 11, 2008

Gas prices have now declined for 25 straight days.  The national average price for a gallon of regular, over the weekend, fell to $3.81, down from about $3.82 on Friday, according to a AAA survey of gas stations.  CNN Money reports, "Gas prices have fallen more than 7% since hitting a record high of $4.114 on July 16, though prices remain more than $1 above year-ago levels." 

How much further will prices drop?  A decrease in the price of oil is part of what's driving the declining price of gas.  Tom Kloza at the Oil Price Information Service tells MSNBC "as the savings from the lower cost of crude flow through the system, we can expect another 10 to 20 cents a gallon of what he calls 'catch-up' price weakness at the pump." 

But the cost of oil is declining, in part, because U.S. demand for gasoline is declining.  As high prices force Americans to drive less, we're using less gasoline, which ultimately drives down the price at the pump.  The Houston Chronicle notes, "What goes down may come up once the drop in prices makes fuel consumption more attractive."  It may seem unlikely that Americans will view $3.81 as a bargain and begin driving as much as we used to, but "last summer, Americans breezed through once-unthinkable $3-per-gallon gasoline, driving as much as they did in 2006." 

In addition, declining U.S. demand may not be enough to offset growing demand in China, India and other developing nations.  The Wall Street Journal notes, "Many experts say that as the global economy continues to slow, oil prices will drop, possibly under $100 a barrel," but, "Over the long haul…growing oil-production challenges suggest prices isn't stay below the $100 milestone for very long, if they do get that low."

Political instability in oil-producing nations is also a risk.  AFP notes that crude prices rose in early trading this morning due to the new conflict over South Ossetia, "after oil exports normally carried out via Georgian ports were halted over the weekend owing to an escalation in fighting between Georgia and Russia." 

The bottom line for you?  Don't expect that SUV to look like a good investment again any time soon.  The price we pay at the pump will probably drop this fall.  But over the long run, it's only going up.

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