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What’s behind the sudden drop in U.S. gas prices?

October 18, 2014 at 6:47 PM EDT
According to AAA, the average price of a gallon of regular gas in the U.S. dropped from $3.52 in late July to $3.12 today. Isaac Arnsdorf, an energy and commodities reporter with Bloomberg News, joins Hari Sreenivasan to explain the factors contributing to the drop.

HARI SREENIVASAN: As you no doubt know, gas prices have fallen sharply in recent weeks.  According to AAA, the average price of a gallon of regular was $3.52 in late July.  Now, less three months later, it’s $3.12.

For more, we are joined now by Isaac Arnsdorf.  He is an (INAUDIBLE) with Bloomberg News.

So we’ve seen it decline a lot and sometimes there’s a lag between the price of oil and the price of gas.

So are we likely to see the price of gas go lower?

ISAAC ARNSDORF: It could continue to tick down a little bit.  We are seeing oil prices start to stabilize, significantly lower than they were this summer, but it depends sort of where oil goes from now.  If oil continues to its freefall, really, or finds a floor around $80 a barrel.

HARI SREENIVASAN: And is it likely to last?

I mean, there are so many different factors that are pushing it down.

ISAAC ARNSDORF: Absolutely.  We’ve got very soft demand globally and expanding supply from the U.S. and really all eyes are on OPEC now to see if they cut back supply or continue to add supply and let prices continue to fall.

HARI SREENIVASAN: OK.  And there were comments made by the IMF in Saudi Arabia earlier this week about what’s good and what’s bad for Saudi Arabia and what’s that price point.

What’s that all about?

ISAAC ARNSDORF: Well, the IMF estimates that Saudi Arabia needs about $83 a barrel to break even on its budget.  But Saudi Arabia has a lot of currency reserves and very good credit.  They’ve run deficits before and they could withstand it for some time.

So lower prices, while it would reduce Saudi Arabia’s income, it would actually probably hurt some of their big rivals more, like Iran or Russia.  So, you know, there’s — analysts are sort of split.

Is OPEC just not hanging together?  Or there’s a camp that thinks maybe Saudi Arabia is all right with the prices being lower.

HARI SREENIVASAN: And so what’s the upside here?

When prices fall at the pump, consumers in the United States actually feel better about it because they’re paying less at the gas station, but what are kind of the economic ripple effects when there are low gas prices?

ISAAC ARNSDORF: Absolutely.  This is about the equivalent of a $500 or $600 tax cut for every household and that’s money that will probably basically be spent right away because so many Americans live paycheck to paycheck and spend everything in their pocket so anything that they save on fuel, that’s money that will go right into the economy and into consumer spending.

And that will happen pretty quickly and the economic effect of that could be about 0.4 percent of GDP growth.

HARI SREENIVASAN: Wow.  How does that ripple into, for example, the holiday shopping season?

Or is that more money in the pocket that can have — that we can start spending on toys and gifts, et cetera, et cetera?

ISAAC ARNSDORF: Yes.  The other interesting thing about gas prices, as it’s often been noted, is it’s really peculiar the way we buy it.  We sit there and we watch the dollars roll by.  So even more than the actual effect on income is this psychological effect on consumer confidence because we really notice when those prices move around as we watch them go by.

HARI SREENIVASAN: OK.  So to recap, the big reasons are that China is perhaps demanding less oil?


HARI SREENIVASAN: And at the same time that the U.S. is creating more natural gas and oil reserves?  Or…?

ISAAC ARNSDORF: Yes, so the U.S. is producing a lot more oil domestically, importing a lot less, which makes a lot more oil available on the world market to go to Asia.  But China is not importing — or the growth is slowing down there.

Also, in developing countries, cars are getting more efficient and people are driving less.  So demand globally is growing at the slowest pace since 2009 and 2009 was, obviously, a very weak year.  And at the same time there is all this supply coming on from the U.S. and elsewhere.  So that’s why we’ve seen prices take such a nosedive.

HARI SREENIVASAN: OK.  Isaac Arnsdorf from Bloomberg news, thanks so much.