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The surprising reasons why gas prices have fallen sharply

The U.S. economy has been dragging along lately, but here's a small shot in the arm. Gasoline prices have fallen to their lowest level in 33 months:

The average price of gasoline nationwide has dropped from $3.74 per gallon in February to $3.19 today. In states like Missouri and Texas, gasoline has sunk below $3 per gallon at the pump, a price not seen in years.

Economists tend to think a fall in gasoline prices can help stimulate the economy by giving people more money to spend on other goods. Think of it like a tax cut. Earlier this month, the forecasting firm Macroeconomic Advisers estimated that falling gas prices could add 0.3 percentage points to third-quarter GDP growth.

But why is this happening? The reasons for the recent fall in gasoline prices are varied, but here are some of the big ones:

-- Gasoline prices typically rise in the summer and go down in the winter. That's because people take more vacations when the weather's nice, and refiners have to put out a pricier "summer blend" of gasoline that's mixed with butane and other ingredients to prevent evaporation in the heat. Once the summer's over, gas prices typically fall again. So that's worth mentioning. But this isn't the only factor here.

-- The supply of gasoline is up — for odd reasons. U.S. stockpiles of gasoline were at 210 million barrels in the first week of November, up about 4 percent from the same period last year. Normally, refineries cut back when stockpiles are high. But there are other forces at play here.

Many Gulf Coast refiners are taking advantage of the boom in shale-oil drilling in the Midwest and producing ever more diesel for export to Europe and Asia. That's a lucrative business. And that refining process also produces more gasoline for domestic consumption. So, as The Wall Street Journal reports, refiners can still make a profit from exporting diesel abroad even if they're creating a glut of gasoline here at home.

-- Fewer refinery disruptions. It's been a fairly quiet hurricane season in the Atlantic this year — with not a single hurricane making landfall. That means U.S. refineries have seen relatively few disruptions of late, apart from Tropical Storm Karen in October and scheduled shutdowns for maintenance.

-- Oil prices have declined moderately. The price of oil typically makes up about 70 percent of the cost of gasoline. And a barrel of West Texas Intermediate crude cost just $93.60 on Tuesday, down from around $110 in September. Oft-cited factors for the drop include growing U.S. crude supplies and an easing of tensions between the United States and Iran. This also isn't the whole story, but it's a factor.

-- Gasoline demand has been fairly restrained. In recent years, Americans have been buying more efficient cars and light trucks, in part due to new fuel-economy standards by the Obama administration. That's helped keep a lid on prices. But this trend may not last for long if driving demand picks back up.

-- A bet on weakened ethanol rules. Earlier this year, many refineries were buying up renewable credits, known as "RINs," in anticipation that the Environmental Protection Agency would tighten its rule on how much ethanol needs to be mixed in with gasoline in 2014. The price of RINs soared, which, in turn, may have driven up gasoline prices.

The opposite is happening now as many observers think the EPA could weaken its ethanol targets for 2014 (a leaked draft suggested as much). Partly as a result, the price of RINs has fallen sharply since July — and with it, some analysts think, the price of gasoline.


The big question is whether prices will keep dropping — or whether they'll eventually rebound sharply the way they did in 2011 and 2012 after temporary lulls. The winter drop in gasoline demand is obviously seasonal and temporary. And there's always the possibility that geopolitical unrest could send oil prices soaring.

For now, however, the U.S. Energy Information Administration is predicting that U.S. gasoline prices will stay restrained in the year ahead — falling from an average of $3.50 per gallon in 2013 to $3.39 per gallon in 2014. That's still much higher than they were a decade ago. But it would count as a small bit of relief for the broader economy.