Why are Gas Prices Coming Down?

Gas prices are dropping!  Woohoo!  No complaints here.  In fact, I’ve already begun to feel the weekly cost difference, and what a sharp contrast since the post I made a month ago about how insane prices had gotten.  So, my question is this… 

What happened?

First, let’s get the facts out of the way before I start asking about the “why’s”…

Here’s the curve…

Look at the dip on the end of that puppy, will you?!  Gas prices (national average) are down $0.337 over this time last year, dropping $0.227 ($2.845 the week of 8/28 vs. 2.618 this week) in the last three weeks and almost 11 cents/gallon in the last week alone.  Now it’s not like I can now afford that surgery I’ve always wanted, but still I say again…  Woohoo!

So, the big question is why?

Well, supply and demand are constant.  China didn’t see a major dying off of 100,000,000 citizens or anything.  No radically new technology.  There are only three factors…  Politics, Speculation and Complacency.

Politics

Iraq is a mess.  Iran and South Korea are sabre rattling.  Good ole’ Putin and our friend Hugo down in Venezuela are still as much NOT our friends as ever.  The big variable that’s changed … cease fire and UN troops in Lebanon.  Do I think that really matters?  No. 

Yes, it adds to a sense of stability (or rather, detracts from an overall sense of instability), but it’s not making the 23-cent difference in the price of regular unleaded, is it?

Speculation

No other way to slice it, speculators drive the market.  Traders get out on the floor and bid this stuff up as high as it can go — based on their belief they can capitalize on fear and a healthy dose of mob mentality.  And when something goes right (Israel-Lebanon, as the world perceives it) and prices are already astronomically high (which they were), then people become hesitant to continually throw their lot in with the doomsayers and bet that prices will run up endlessly.  And a correction occurs, as it is / has / will.  And we get to drive to work a little cheaper.  And some of the bolder in the (speculator) business are losing their shirts in the process.

Complacency

Here’s a big one.  The American people (especially) just have short attention spans.  Something like a war in Iraq gets on the radar only briefly.  There’s a reason why the news media has to continually “drum up business” by bombarding us with the constant drama, death and destruction.  And it even has to escalate.  Otherwise, people will stop paying attention.  As long as bombs aren’t dropping on their favorite Starbucks, people just cease to pay attention quick — if they ever paid attention at all. 

And although this definitely applies to the huddled masses, they aren’t whom I’m talking about here.  Really I think this ties back to the investors.  The kind of complacency that goes hand-in-hand with a long-running war in our country lends itself well to the cold feet I described above.  If the average investor doesn’t feel the immediacy of the doomsday predictions, then they get scared and start selling — or betting the other way.  Without the riveting fear to keep them motivated, natural market forces will course correct.  Which is why the slightest good news after a massive string of bad news causes such a correction.

Another Answer?

So, it that it?  I’ve heard a number of more colorful theories, even including that since Oil Companies have come under scrutiny in the past month or so, they’re now afraid and dropping prices to get the heat off.  And I have to say, as someone who very rarely buys into conspiracy theories, I don’t buy it.  It’s interesting, but I just don’t think so.  What do you think?

Unsatisfied

The problem is that I don’t see how the other three factors would have such an impact.  >10% in 3 weeks?  Am I underestimating the power of a natural course correction?  Or of paranoia?  Maybe so, but I’m curious what you think.

So that’s my question to all of you…  “What do you think?”  What’s driving prices down?  Have I covered it, or am I missing something? 

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About Jeff Block

Lover and follower of Christ. Husband and father. Writer and seminary student. On a long journey, learning to swim with the current of God's love and walk with Him in the garden in the cool of the day.
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2 Responses to Why are Gas Prices Coming Down?

  1. Neva says:

    Well, I admit I haven’t been paying a lot of attention to gas prices. I’ve started taking the train in to campus now that the new extension line is open, so I filled up my car this week for the first time in almost a month.

    Now that you have me thinking about it, I’ll just add a couple of factors that I didn’t see on your list that I think may be making a contribution.
    1) The start of fall. Gas prices almost always go up a bit over the summer as a result of the number of people taking road trip vacations. So now that everyone’s back in school and done with summer trips, prices tend to head down a bit. No, I don’t think that’s responsible for the huge dip, but I think it could be a partial factor at least.
    2) Hurricane season. After last year’s awful hurricane season, people were predicting that this year would be equally bad. Given the disruption last year’s hurricanes caused to the oil supply line and oil prices, speculators had knocked the price up some this summer in preparation for further weather-related disruption. Now that the forecasted hurricane disasters have failed to manifest, that adjustment is being taken out and prices are coming back down.

    Basically, I’d imagine it’s a combination of all of these factors and possibly more that, not being into economics, I couldn’t even guess at.

    Like

  2. Jeff Block says:

    Neva… I can go with both of those, and I think you’re right that it’s a whole confluence of factors working in the aggregate that are getting us cheaper prices at the pump. The big one, in my mind, continues to be the overblown expectations of the speculative investors — who are getting absolutely hammered right not, btw.

    According to illinoisgasprices.com, the average price of gas in Illinois on 8/6 was about $3.15. As of yeseterday, 9/23, the average price has dropped to about $2.35. That’s a drop of > 25%.

    So, the speculators blow my mind. This is the 5th year in a row (every year since 9/11) that I’ve seen and heard people running around waving their arms in the arm screaming that gas would hit $5 a gallon every summer. Every summer it was going there, and every summer it hasn’t. I just roll my eyes, and keep buying my set of index funds and diversified mutual funds.

    Now, of course, the oil barron tune has changed for a brief time. These days, a number of speculators are suggesting that gas prices are going to plummet … predicting prices as $1.15 a gallon. Well I say, “Rock on!” But there’s no way I’m betting on that one. And these same nutty people (actually different ones, because these’ll get wiped out too) will be saying by Easter that next summer it’ll be over $5 again.

    Anyone got a set of earplugs?

    Like

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