6 Ways Gas Prices Could Fall Back to $3

AAA reports that the average price of a gallon of gasoline on Sunday was $3.94. A year ago, that figure was $2.89. The price of regular grade gas in many large states like California and New York is more than $4, which means most Americans are probably paying at least that amount. Premium grade gasoline is more than $4 everywhere.

Gas prices could drop sharply, however. This occurred in the second half of 2008, although that seems like decades ago. The same forces that pushed prices down then could return in the second half of this year.

They include:

1. Demand in China Wanes

China's purchase manufacturer's index failed to rise in April. China is the world's largest net importer of oil. Several things could push prices down there. First, the Central Government could cut gas subsidies. This may be used as a way to tighten money flow and combat inflation. China's GDP and exports could also slow naturally if the economies of the U.S., the U.K., and E.U. falter. Japan's demand will almost certainly shrink, and it is the second largest net importer of oil in the world.

2. Demand in the U.S. Slackens

GDP growth in the first quarter was only 1.8%. Gas prices, among other things, could push that figure down further in the current quarter. Consumer spending is already being hurt by rising gas and other commodity prices. Unemployment has only improved modestly, and another tick down in economic growth could stall hiring or even reverse it.

3. Some of the Middle East Unrest Ends

Libya has been pressed both militarily and economically. Muammar Abu Minyar al-Gaddafi may become a target of NATO strikes. Ali Abdullah Saleh may leave his longtime post as the head of Yemen. Turmoil in Bahrain could end, which would bring some measure of peace to the country.

4. OPEC Blinks

OPEC may become more concerned that a slowing world economy will cause a sharp drop in demand for crude. That, in turn, would hurt the receipts of the treasuries of member nations. The Saudis have said global oil supply is adequate. An ongoing sharp increase in crude prices could cause a reverse in that sentiment. OPEC may elect to ask its members to export more crude, at least temporarily.

5. Releasing Some of the U.S.'s Strategic Petroleum Reserve

The U.S. could release some amount of its 727-million-barrel Strategic Petroleum Reserve, the largest stockpile of crude held by any national government. President Obama rejected this as a possibility just two months ago. But his administration is under pressure to do something to undercut rising gasoline prices. The federal government cannot control imports if it does not increase supply within the U.S. by sharply increasing the availability of crude within its borders.

6. Congress Drops the Gasoline Tax

Congress could decide that, despite the fact that it would add to the deficit, it is willing to temporarily drop the 18.4 cents-per-gallon tax on gasoline. This would mean a gamble that the short-term sacrifice of receipts to the Treasury is worth an action that could prevent the U.S. from entering a second recession.

Presented by

Douglas A. McIntyre

Douglas McIntyre is editor of 24/7 Wall St.

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