Freshly returned from a few months spent with his new baby (congratulations!), Alexis Madrigal at the Atlantic wonders why gas prices are falling in the US. He notes that the national average is the lowest it’s been in almost three years.
He identifies a few factors that influence gas prices, most notably world oil prices. These prices have fallen, due both to demand and supply factors, and most importantly how higher gas prices induced consumers to change their behavior:
But they [gas prices post-Arab spring] couldn’t go too high because, at least here in the U.S., demand has softened. Americans are buying (slightly) more fuel-efficient cars, on average. And younger people are driving less.
Which is all a pretty rational response to the big run up in gas prices during the mid-2000s.
He then points out (courtesy of Brad Plumer) something that shows just how complex the dynamics are in gasoline markets — gasoline and diesel are joint products, so to produce more diesel you get more gasoline. Diesel is in high demand in Europe, thanks in part to the economical and energy-efficient, yet also sassy and full of fun, TDI diesel engines from Volkswagen and Audi (and it’s an interesting question to ask why US regulations still provide such barriers to TDI diesel, but I’ll leave that as an exercise for the reader ;-0 ). If you are refining diesel in the US to export to Europe, you will increase the supply of domestic gasoline, shifting the supply curve out. In the face of that softened demand, that’s going to mean lower prices.
A couple of neat points, but this post is mostly an excuse for me to say how glad I am that Alexis is back from paternity leave! I missed his writing.