Gas prices — How low could they go?

Every American motorist has noticed the steady fall in pump prices.

Patrick De Haan, GasBuddy.com chief petroleum analyst

The U.S. average for unleaded gasoline, as of Thursday, Dec. 1, was at $3.47 per gallon, having fallen 12 cents in one week.

The drop represents the steepest one-week decline in price since August, four months ago.

The Southeast Missourian caught up with an industry analyst, Patrick De Haan of GasBuddy, to find out what is causing the welcome decline in what motorists pay at the service station.

How would you characterize what's been happening with gas prices?

It's fair to say they are gently declining. This has been the general trend since mid-October and prices have gone down almost 50 cents a gallon since then. We saw a bump in the road in early November where we saw a small increase, but it only lasted about a week. The peak was $4.72 in Missouri earlier this year and on Thursday of last week it was $3.03.

Some Missouri stations are all the way down to $2.54.

Why are prices dropping?

First, it's important to understand why they went up so dramatically.

The U.S. economy was essentially on fire earlier this year. Everyone started to get out, offices reopened, mask mandates were dropped and America was returning to some semblance of normalcy. After an economy almost sequestered with shutdowns due to COVID, we used the opportunity to start spending. Couple that reality with government stimulus and Americans resumed spending. They got out of the house, resumed buying goods, started doing home projects and began driving around again. The economy was at a breakneck pace.

Demand for fossil fuels, as a result, surged — especially compared to the COVID lows, when Americans weren't driving. The COVID lows caused shutdowns in oil production and some refineries producing gas and diesel permanently closed. The U.S. has 5% less refining capacity today compared to pre-COVID, and we're talking millions of barrels a day.

As the economy was returning to top gear, Russia invaded Ukraine, causing abrupt policy shifts restricting the flow of oil at a time it was badly needed. This is what caused oil prices to skyrocket. Gasoline and diesel inventories plummeted, partially due to less capacity because of the pandemic and partly because the West tried to shut down Russia's product flow. However, prices began to moderate this summer because Russia has been able to find buyers for its oil — not from the U.S., not from the European Union, but from China and India, who bought at a discount, oil on the cheap.

Really, though, the situation started to improve at the pump when Americans stopped buying as much fuel. Demand here started to go down, and as Russia exported its products to new buyers, the market started to cool off. In the last three months, demand for gas has plummeted because of fears of a recession, an economic slowdown. The Federal Reserve raising interest rates really started to throttle back our economy. The Fed's actions were effective.

We came off our peak summer consumption of gasoline. Demand drops almost every week until it bottoms out, usually, in February. U.S. refineries, which underwent maintenance after the summer driving season, are now back online. China has been struggling economically and demand is down there, too. Americans aren't consuming as much gas, refineries are producing more than usual for the U.S. market and all of this is helping develop supply, a reserve of gasoline. Right now, everything is going in the motorists' favor.

Is the U.S. constructing more refineries post-COVID?

No, we're not building new. It's true that one existing refinery is expanding in Texas. Also, a New Jersey refinery, which had been shut down for two years because of the pandemic, came back online this August but I think that's the last refinery that can rebound. Some refinery shutdowns during COVID have become permanent.

There will not be a refining boom and here's a big reason: Oil companies are reluctant to invest in a $10 billion to $15 billion refinery when the White House is actively pushing electric vehicles. If you start building a new refinery now, it won't come online for five years, and if the government is pushing EVs so hard, what's the incentive for oil companies? In Nigeria seven years ago, a $25 billion dollar investment was made to build a new refinery. But is that African refinery going to be needed in 10 years because of the trend toward EV? That's what U.S. oil companies think about.

And if a windfall tax on oil gets anywhere in Washington, this will also have an impact. There is some damage being done by the Biden administration because government policies create uncertainty in the market. The only way we're going to get out of price spikes in the future is if demand continues to fall and if these refining projects become operational overseas.

Do you see a bottoming out of gas prices? How much lower can they go?

There is a distinct possibility nationwide gas prices on average could fall under $3 a gallon by year-end. But a heavy caveat is needed here. Between now and then, will the world hold still? If China's current zero-COVID policy goes away, gas prices could go through the roof. Less than a $3 a gallon average nationally could happen theoretically, but something could happen between now and January 1, 2023, to potentially derail the slide. In some ways, your guess is as good as mine since the world situation is always in flux.

Diesel is considerably more expensive than unleaded gasoline. A year ago, diesel cost $3.63. Late last week, the price was $5.15. Why?

Russia produces a heck of a lot of diesel, which is heavy oil. Canada, another cold climate, does the same. The Middle East produces light crude, which is what we use to power most of our cars and trucks. The diesel price is especially impacted because of Russia's war with Ukraine. Additionally, refineries typically produce twice as much gas as diesel. With diesel, it's where product is coming from — mainly Russia — and also, refineries don't kick out as much diesel as the gas we typically use in our cars, so it's a supply issue.

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