“People are realizing that they could go back to spending $50 to fill up their tank instead of $80,” said Emma Rasiel, an economics professor at Duke University. “This is the main signal that consumers notice about inflation. That’s the only thing they’re likely to track, how much has gone up or down, because every week they have to fill up their car.
But Rasiel warned that cheaper gas can also give consumers the wrong idea. The prices of other goods and services are much less volatile, and there is no evidence that this more affordable fuel moment is driving down the cost of other things.
Even though falling prices at the pump are helping to fuel a national holiday shopping frenzy, it reflects the financial hardships consumers and businesses are facing around the world. Prices fall because demand for oil and gas declines as countries brace for recession and covid-19 outbreaks in China threaten major financial disruption, and drivers are cutting back on gas as they try to save money to cover soaring mortgage payments and stock market losses.
Earlier fears that sanctions on Russian oil would create a supply shortage and drive up prices towards the end of the year have, for now at least, given way to struggling economies and markets. nervous financiers.
“We are heading for a severe recession in Europe and another economic downturn in the United States as people grapple with high interest rates and worry about their personal wealth and savings,” Ben Cahill said. , energy security analyst at the Center for Strategic and International Studies. . “Add it all up and it creates a gloomy picture of oil demand. The prices reflect this.
Some key U.S. oil refineries are also helping to keep prices low right now, which has started producing gasoline again after months of downtime for maintenance and repairs
But just as important is the current unrest in China. As its leaders signal that further covid shutdowns are imminent, sparking nationwide protests, the expected economic fallout has made oil traders bearish.
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China alone accounted for 16% of global oil demand last year, according to research firm Capital Economics, which forecasts its oil purchases will drop by 1 million barrels a day in December as covid infections will spread. The effect of such a drop on world oil markets is considerably, reducing the price of Brent crude by as much as $10 a barrel, or more than 10%.
“With COVID cases reaching record levels in China and the threat of widespread lockdowns growing there, the key question is how much demand might fall, freeing up supply for the rest of the world,” Edward Gardner, a commodity economist at the firm, writes in a research note.
While the high cost of gasoline for much of the past year has been a major factor in the crushing inflation that has hit the United States and other countries, the current drop in fuel costs is not contributing little to restore economic stability. Manufacturers that rely on large amounts of fuel need to see sustained low prices for several months before adjusting the costs of the products they sell, analysts said. Drivers in some parts of the country benefit much more than others. Californians still pay an average of nearly $5 for a gallon of regular fuel.
“This is a pretty delicately maintained price decline,” said Patrick De Haan, head of oil analysis at GasBuddy, noting that any number of geopolitical or economic events could cause prices to rebound.
There are other important factors that make the price outlook murky. The United States and Europe are negotiating a price cap on Russian oil, which will take effect on Monday. The plan is to allow Russian oil to continue flowing into world markets, but at prices that limit the profits the Kremlin can use to fuel its war machine.
Such a price cap has never before been imposed on a major oil-producing country, and it threatens to trigger further instability. If the cap is set very low, as advocated by some European countries, Moscow could retaliate by cutting off its supply, creating a global price spike.
Another wildcard is the OPEC Plus consortium of oil-producing nations, which is meeting next week to consider how much oil its members should continue to ship in the coming months. The group could decide to reduce its production to raise prices.
“The OPEC meeting could be the picnic skunk,” said AAA spokesman Andrew Gross. “Trying to guess what they’re going to do is tricky.”
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These are the kinds of things that worry John Catsimatidis, who owns hundreds of gas stations and a refinery. But not because they might affect his fuel business. When the businessman talks about gas prices, he focuses more on what they might ultimately mean for another business in his multi-billion dollar empire, one focused on real estate development.
Skyrocketing borrowing costs have made this endeavor much more difficult. A six-month stretch of $3 gas, he said, could help dampen inflation and signal that it’s prudent for the Federal Reserve to reverse its recent rate hikes.
“If we lower the price and it stays there, we could solve the inflation problem and the Fed can stop raising interest rates and put everyone out of business,” Catsimatidis said.
One thing is clear, and that is that there is little Washington leaders can do to keep gas prices low. They are at the mercy of world markets.
The Biden administration is likely to pressure Saudi Arabia, which dominates OPEC Plus, not to cut production. But the administration’s lack of influence on such things was clear the last time OPEC Plus met, in October, when the group rejected Washington’s request to increase production, cutting it to instead of 2 million barrels per day.
Last week, the administration eased sanctions on Venezuela in an attempt to get oil from that country flowing again. But it will be several months before Venezuelan oil is shipped, and only marginal quantities will be available at first.
Most drivers pay little attention to the broader dynamics of the global oil market. But even they take a cautious approach, despite perhaps splurging on holiday gifts.
Data collected by AAA suggests they are sticking to the conservation-conscious driving habits adopted when gas rose above $5 a gallon, packing more errands into car trips, driving at slower speeds, only partially filling their gas tanks. Prices may have fallen, but drivers aren’t giving up.
This is also clear in consumer outlook, which often improves when gasoline prices fall. But the University of Michigan’s Consumer Sentiment Index suggests that this current supply of cheaper gas is overshadowed by other financial challenges facing Americans. Even though gasoline prices fell, the national survey shows consumer anxiety increased in November.
“Even though gasoline prices have come down, prices for other things are still high,” said Joanne Hsu, who leads the university’s consumer surveys. “There is a huge sense of uncertainty.”
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