The cost of gas is dropping. Here’s why, and how long the lower prices might last.

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Gas prices fell so quickly that motorists began to put real money in their pockets, defying previous predictions and making a surprise gift for the holidays.

Gasoline is as cheap now as it was in February, just before Russia’s invasion of Ukraine triggered a global energy crisis. AAA reported the national average price of a gallon on a regular Wednesday at $3.50, and gas price tracker GasBuddy predicts it could drop below $3 by Christmas. And all that relief probably helped spur a strong shopping spree over Thanksgiving weekend.

“People are realizing that they can go back to spending $50 to fill up the pitcher instead of $80,” said Emma Rasiel, a professor of economics at Duke University. “That’s the main signal that consumers get about inflation. It’s the only thing they can monitor, see how much it goes up or down, because they need to fill up their car with gas every week.”

But Rasiel warned that cheaper gas could also mislead consumers. The prices of other goods and services are much less volatile, and there is no indication that the timing of more affordable fuel is driving down the cost of other things.

Even as the pump drop helps boost shopping during the national holiday, it reflects the financial strain consumers and businesses are facing around the world. Prices are going down as oil and gas demand is falling as countries brace for recession, coronavirus outbreak in China threatens major financial disruption and drivers cut gas consumption as they try to save money to cover skyrocketing mortgage payments and stock market losses.

Previous concerns that sanctions on Russian oil would create a supply shortage and send prices soaring later this year have, at least now, given way to ailing economies and financial market turmoil.

“We’re facing a severe recession in Europe and a further recession in the US as people move around,” said Ben Cahill, energy security analyst at the Center for Strategic and International Studies. struggling with high interest rates and worries about their personal wealth and savings.” . “It all adds up to a bleak picture of oil demand. Prices are reflecting that.”

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Also helping to keep prices low at this point are several key US refineries that have returned to producing gasoline after months of shutdowns for maintenance and repairs.

But an equally big factor is the turmoil in China. As its leaders signaled that new coronavirus lockdowns were imminent, sparking protests across the country, the expected economic fallout sent oil traders into a frenzy. discount mine.

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China alone accounted for 16% of global oil demand last year, according to research firm Capital Economics, which predicts the country’s oil purchases will fall by 1 million barrels per day in December as the virus spreads. coronavirus spread. The impact of such a drop on the global oil market is significantly, reducing the price of Brent crude by as much as $10 a barrel, or more than 10%.

“With the number of COVID cases soaring to a record high in China and the risk of widespread lockdowns there growing, the key question is,” said Edward Gardner, commodities economist at Capital Economics. how much demand can fall, freeing up supply for the rest of the world.” wrote in a research note.

While the high cost of gasoline for most of the past year has been a major factor in the severe inflation that has hit the United States and other countries, the reduction in fuel costs has not done much to stabilize the economy. determine the economy. Manufacturers that rely on large amounts of fuel need to see low prices last for months before they adjust the cost of the products they sell, analysts say. And drivers in some parts of the country are benefiting significantly more than in others. Californians are still paying an average of nearly $5 for a gallon of regular gas.

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Patrick De Haan, head of petroleum analysis at GasBuddy, said: “This is a fairly well-organized drop in prices, noting that any geopolitical or economic event could be a factor. causing prices to rise again.

There are other big factors that make the price outlook bleak. The United States and Europe are negotiating a price ceiling for Russian oil, which will take effect on Monday. The plan is to allow Russian oil to continue flowing into the global market but at a price that limits the profits the Kremlin can use to maintain its war machine.

Such a price ceiling has never been imposed on a major oil-producing country and it risks causing further instability. If the cap is set very low, as some European countries are advocating, Moscow could retaliate by cutting off its supply, triggering a global bull run.

Another wild card is the OPEC Plus consortium of oil-producing nations, which meets next week to consider how much oil their members will continue to ship in the coming months. The group may decide to cut output to push up prices.

“The OPEC meeting can be a skunk in the picnic,” said Andrew Gross, a spokesman for AAA. “Trying to guess what they’re going to do is hard work.”

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Those are the things that worry John Catsimatidis, who owns hundreds of gas stations and an oil refinery – but not because they could affect his fuel business. When the businessman talks about gas prices, he focuses more on what they ultimately mean to another business in his multibillion-dollar empire, which focuses on real estate development.

Rising borrowing costs make that business even more difficult. A six-month stretch on $3 gasoline could help ease inflation, he said, and signal that the Federal Reserve may ease recent interest rate hikes.

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“If we lower prices and it stays there, we can fix the inflation problem and the Fed can stop raising interest rates and put people out of business,” Catsimatidis said.

What is clear is that there is little that leaders in Washington can do to keep gas prices low. They depend on the global market.

The Biden administration is probably pressuring Saudi Arabia, which dominates OPEC Plus, not to cut its output. But the administration’s lack of influence over such things was evident the last time OPEC Plus met in October, when the group rejected Washington’s demand that it increase output, cutting production instead. 2 million barrels per day.

The administration last week eased sanctions on Venezuela as part of an effort to get oil flowing from that country back. But it will be many months before Venezuelan gasoline is shipped, and there will be only a small amount at first.

Most drivers pay little attention to the broader dynamics of the global oil market. But even they are taking a cautious, albeit possibly extravagant, approach on holiday gifts.

Data collected by AAA shows they’re sticking to frugal driving habits adopted as gas soars past $5 a gallon, putting more errands into car trips, driving At slower speeds, only partially fill the fuel tank. Prices may have dropped, but drivers don’t let go of the brakes.

That’s also evident in the consumer outlook, which usually improves when gas prices fall. But the University of Michigan’s Consumer Sentiment Index shows that this stream of cheaper gas is being overshadowed by other financial challenges that are stressing Americans out. Even as gasoline prices fell, the national survey found, consumer anxiety increased in November.

Joanne Hsu, who directs the university’s consumer surveys, said: “Although gas prices have fallen, prices for other things are still high. “There is a very unsettling feeling.”

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