Prices at the pump have dropped to four-year lows, saving consumers cash but making economists uneasy.
On Monday, the national average for gasoline is $3.09 per gallon. In 16 states the average gas price dipped below $3. The cheapest gas in the country is in St. Louis, Missouri, where it has averaged $2.79 per gallon, according to gasbuddy.com.
“Prices on average have tumbled 15 cents a gallon so far this month and are down about 50 cents a gallon from the recent peak on June 28,” says MarketWatch.
What’s behind the sudden plunge in prices?
A quick summary of the situation is basic: more supply coupled with less demand, reports CBS MoneyWatch.
There has been a surge in global oil production. “America is in an … oil boom, driven by an explosion of (hydraulic fracturing or “fracking”) in North Dakota, West Texas and other parts of the country. The U.S. is now producing some 8.7 million barrels a day, the highest level in decades,” reports MoneyWatch.
“Libya and Iraq are ramping up production as well,” says MoneyWatch.
Meanwhile, “demand for petroleum products is declining worldwide,” says the New York Times. “The thirst for oil is declining in Europe, where unemployment and industrial activity is down, and Japan, where the use of oil by utilities is being replaced by natural gas and coal.”
Slowing economic growth in China also plays a role in decreased global demand, says MoneyWatch.
The Middle East oil cartel, Organization of Petroleum Exporting Countries, which wants to keep oil prices at $100 per barrel, has been forced by the market to decrease its prices. As of Monday, the international benchmark price per barrel was $85.25, according to theNASDAQ.
“In recent days several members of (OPEC) — Saudi Arabia, Kuwait, Iraq, Iran and the United Arab Emirates — have cut prices to European and Asian buyers as competition for global market share has grown fierce,” the New York Times reports.
The sudden drop in prices may be temporarily good for the consumer, but it has experts fearing international ramifications.
Countries, like Russia and Venezuela, that rely on oil revenue for stability are facing impending recession.
"Venezuelan Foreign Minister Rafael Ramirez called for an emergency OPEC meeting to (persuade) member countries (to) cut production to keep prices above $100," reports the Associated Press.
The decline in prices is also impacting the stock market. "On Wednesday, the Dow Jones Industrial Average fell, dropping nearly 500 points at one point in the day before recovering. The move seems at least in part to be driven by oil prices, which are also falling," Fortune reported last week.
The slip in prices could also shock the American oil industry, and in turn slow the economy. If low prices continues, oil companies will need to pull back production in order to reduce costs, reports the New York Times.
And consumers large and small shouldn't get too comfortable with their extra cash.
"The problem is that countries get accustomed to a certain level of income, and then spend," Edward Chow, a senior fellow at the Center for Strategic and International Studies, told the AP. "It seems like a windfall at first but when it lasts long enough you get used to it."
At the same time, if consumers don't spend their windfall of extra cash in other realms, like in retail, then the economy will stagnate, says Fortune.
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