One thing that has happened recently, is that gasoline prices have finally come down in a noticeable manner in our local area. For a significant time prices in the Los Angeles region had been about a $1 per gallon higher than the national average. That differential has narrowed recently, but prices in our area are still about 75 cents per gallon higher than the national average.
In recent years the price differential between California and national prices has been closer to 50 cents per gallon. That is largely due to our higher taxes, and greater refinery costs to meet our pollution standards. Cap and trade legislation has also increased costs, though it is hard to determine what the exact impact of that legislation will ultimately be.
The major costs that go into gasoline are the basic crude oil, refining, taxes, and retail. The cost of crude oil is the largest variable, though refining can be highly variable at times. Taxes only change when there is some new legislation. Retail operations in our area have been rising some due to environmental clean up costs plus higher land values.
Last week there was an agreement reached among some oil producing countries to keep output at current levels. This caused the price of oil to rise somewhat, given that it signaled some cooperation among the oil producing countries. However, this agreement is not likely to have a major impact on the price of oil.
For there to be a major change in oil supply there would actually have to be a cut in output. The major swing producer, Saudi Arabia, as of now is not indicating that they are willing to cut output, but only to freeze it. Iran mentioned that they are open to cooperation, but with the removal of sanctions, they will be producing more oil.
Oil and gasoline inventories are currently at very high levels, which is why prices are low. The freeze in production should allow for inventories to gradually come down. This should prevent prices from falling much further. Ultimately prices will rise, as investments in new oil production have been cut dramatically, which will lower future supply.
The price of gasoline does have a significant impact on consumers purchases of cars, and their driving habits. When prices are lower, as they are now, sales of trucks and SUV’s rise significantly.
One thing that consumers should be aware of is not to base a car buying decision on where gasoline prices are at currently, but where prices will be in the future. Obviously no one can say exactly where the price of gasoline will be at in five years, but some estimate should be made when a person is considering buying a vehicle.
If someone can just barely afford to purchase a SUV when gasoline is at $2.50 per gallon, then making that purchase would not be a wise decision. To be conservative that person should consider in their budget the impact of gasoline at $3.50 or $4 per gallon.
Another impact of lower gasoline prices is that people drive more. In our local area this has a major impact on traffic congestion, as many of our streets and freeways are at or over capacity for much of the day. A recent study has shown that the use of public transit in Los Angeles has been going down, and lower gasoline prices are certainly one cause.
There are also some seasonal issues that affect the price of gasoline. The winter blend of gasoline is cheaper versus the summer blend because of different pollution requirements. We are coming to the end of the winter driving season, so when refineries go to the higher summer blend, that will cause prices to rise. This is independent of whether the price of crude oil changes.
One thing that we have seen in recent years is that the price of gasoline jumps around a lot, both up and down. There is a tendency among some people to expect a current trend to stay in place, but in actuality prices frequently reverse course.
Lower gasoline prices are a positive for consumers, since they have more money to spend on other goods and services. While it is highly unlikely that the price of gasoline will go back to $4 per gallon any time soon, consumers should be conservative in their budgeting and not expect prices to stay permanently at current levels.
