What Would Push Gas Prices Back To $3?

AAA reports that the average price of a gallon of gasoline yesterday was $3.943. A year ago, that figure was $2.885. The price of regular in many large states like California and New York is more than $4, which means most Americans are probably paying at least that amount. Premium gas is more than$4 everywhere.

Gas prices could drop sharply. That happened in the second half of 2008, although it seems like that was decades ago. The same forces that pushed prices down then could be replayed over the second half of this year.

Among them are:

1. China’s purchase manufacturer’s index failed to rise in April. China is the world’s largest net importer of oil. Several things could push prices down there. The first is if the Central Government cuts gas subsidies. This may be a way to tighten money flow and combat inflation. China’s GDP and exports could also slow naturally if the economies of the US, the UK, and EU falter. It is almost certain that Japan’s demand will shrink, and it is the second largest net importer of oil in the world.

2. Demand in the US could slacken. GDP growth in the first quarter was only 1.8%. Gas prices, among other things, could push that figure down further in the current quarter. Consumer spending is already being hurt by rising  gas prices and increases in other commodities. Unemployment has only improved modestly and another tick down in economic growth could stall hiring or even press it into reverse.

3. Some of the political upheaval in the Middle East could end. Libya has been pressed both militarily and economically. Muammar Abu Minyar al-Gaddafi may have become a target of NATO strikes. Ali Abdullah Saleh may leave his longtime post as the head of Yemen. Turmoil in Bahrain could end, which would bring some measure of peace to the country.

4. OPEC may become more concerned that a slowing world economy will cause a sharp drop in demand for crude. That, in turn, would hurt the receipts of the treasuries of member nations. The Saudis have said global oil supply is adequate. An ongoing sharp increase in crude prices could cause a reverse in that sentiment. OPEC may elect to ask its members to export more crude, at least temporarily.

5. The US could release some amount of its 727 million barrel Strategic Petroleum Reserve, the largest stockpile of crude held by any national government. President Obama rejected this as a possibility just two months ago. But, his administration is under pressure to do something to undercut gasoline prices. The federal government cannot control imports if it does not increase supply within the US by sharply increasing the availability of crude within its borders.

6. Congress could decide that, despite the fact that it would add to the deficit, that it is willing to temporarily drop the 18.4 cents per gallon tax on gasoline. This would mean a gamble that short-term sacrifice of receipts to the Treasury is worth an action that could keep the US from a second recession.

Gasoline prices are out of control now. That may not been the case soon.

Douglas A. McIntyre