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Opinion Excited about falling gas prices? Careful what you wish for.

Chevron gas prices in Houston on Dec. 5. (Brandon Bell/Getty Images)

Gasoline prices are falling, consumers are relieved and the president is celebrating. Hallelujah.

But perhaps we should all be careful what we wish for. Part of the reason energy prices are dropping, after all, is that the global economic outlook is darkening.

In the past few months, both crude oil prices and retail gas prices have plummeted, and are back down to where they were a year ago.

Prices are still higher than they were early in the pandemic. But recall that in spring 2020, much of the economy was shut down and people stopped driving; as demand dried up, fuel got dirt cheap. Oil prices even briefly turned negative, before later rocketing upward as the economy reopened and supply chains remained snarled.

The recent declines have provided critical relief to many consumers. They’re also welcome news to President Biden, whose approval ratings are closely linked to these trends because Americans (incorrectly) think presidents can control gas prices. Given that he gets blamed when prices rise, the president has apparently decided he should claim credit when they fall, too. In many recent remarks, Biden declared that lower prices show that his economic policies are “working.”

This is … risky. What goes down can go back up, and now the president has suggested that voters are correct to hold him responsible if things revert. More important, Biden and some allies seem to be ignoring why gas prices are down, and what that might portend.

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There are good and bad reasons prices can fall. Right now we’re seeing a mix of both.

The good reasons have to do with improvements in supply. That is, supply-chain problems are unwinding and more oil is flowing into the global market. U.S. production of crude oil hasn’t recovered to pre-pandemic levels but is edging higher.

The number of U.S. oil rigs has also been steadily climbing, no matter what you’ve heard about Biden’s alleged “war on fossil fuels.” There are more than three times as many active rigs today as there were at the low point in 2020, according to Baker Hughes.

Additionally, some U.S. refineries that had been shut down earlier this fall — either for seasonal maintenance or emergencies — are now back online.

The Group of Seven’s price cap on Russian oil (and associated restrictions on when Western companies can provide tankers, financing or insurance for sales of Russian oil) has also been less disruptive to supply than some analysts feared. Analysts had worried that Russia might respond to this and other Western sanctions by keeping its oil in the ground, which would drive global prices higher. At least so far, that hasn’t happened.

“Russia finds a way to adjust,” said Shin Kim, head of oil supply and production analytics at S&P Global Commodity Insights. Those adjustments include shifting more Russian transactions and insurance to countries not party to the G-7 pact. Whether this constitutes good news for democracy is a separate issue, but it has unquestionably contributed to the supply-side part of this picture.

The more clearly “bad” reasons for declining prices have to do with oil demand. Among them: rising recession risk.

Remember how, during the 2020 pandemic recession, demand for oil dropped, leading prices to plummet? Well, that’s what usually happens in downturns. And part of the reason oil prices have been sliding lately is that markets are again worried about diminishing demand.

Britain and the European Union are probably already in recession. The United States doesn’t appear to be there yet, but risks have grown. Depending on the trajectory of inflation, the Federal Reserve may continue raising interest rates aggressively. It might accidentally overshoot and tank the economy.

Already, U.S. gasoline consumption seems to be trending downward relative to the usual patterns this time of year, according to the U.S. Energy Information Administration, an independent federal agency.

China’s economy is in serious trouble, too. Its “zero covid” lockdowns have shuttered factories and limited other economic activities, which in turn means less demand for fuel. After public unrest, the Chinese government announced it would dial back some of its more draconian policies. But now a surge in coronavirus infections awaits and may cause its own disruptions. China’s actions have spillover effects in other world economies.

It’s hard to quantify exactly how much of the decline in oil and gasoline prices should be attributed to “good” (supply-side) versus “bad” (demand-side) factors. But energy analysts I spoke to said it’s reasonable to believe that demand-side factors are dominating.

“If people were feeling good, if the stock market was going up, oil prices would probably be going up, too,” said Patrick De Haan, head of petroleum analysis at GasBuddy. “The concern about the economy is probably edging out some of the good factors, like rising supplies.”

So by all means, assuming you’re not a climate hawk, enjoy cheap(er) gas while you can. But pay attention to what else that cheaper gas might be telling you.

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