The latest data from the U.S. Energy Information Administration showed that the average cost for Regular gasoline in America fell by five cents over the past week to $2.38 per gallon. That was the second weekly decline in a row and the lowest reading in more than a year. Regionally, the cheapest gas in the country as of this writing can be found in Oklahoma, where a gallon of Regular costs just $2.01 on average, while residents of California as usual have to pay the most in the continental U.S. for Regular ($3.43/gallon). A major factor behind the recent decline at the pump has been a drop in the price of crude oil caused in part by expectations for softer demand. Indeed, the cost for a barrel of West Texas Intermediate crude has fallen during the past few months to the lowest level since 2003 in response to concerns about the coronavirus eventually dragging on global economic growth, and in turn oil consumption, e.g. cancelled flights and less overall commuting.
The International Energy Agency (IEA) on Monday even said that it expects global oil demand to contract this year for the first time since 2009, and the researchers warned that the decline in consumption could be much greater if governments fail to contain the spread of the coronavirus. However, such setbacks could be transitory because if prior outbreaks are a guide any lost economic activity is often quickly recouped after the contagion has peaked and the general fear weighing on consumer and business behavior subsides. Even the gloomy IEA report still anticipates a rebound in demand by 2021. For the time being, though, the price of oil appears likely to remain under pressure. This is a difficult environment for any countries that derive a lot of their income from oil production, and Saudi Arabia over the weekend responded by announcing that it would ramp up its output. Such a move adds more supply to the market, which further lowers prices and hurts other oil producing nations that cannot sufficiently adjust their own output. Cheaper prices can also damage local economies in the U.S. with a heavy reliance on energy companies that often become unprofitable once the price-per-barrel falls below a certain threshold, e.g. parts of Texas and Oklahoma. On the bright side, for American consumers in general the sharp drop in crude prices will lead to further declines at the gasoline pump, which may act as a needed stimulus to lessen the potential economic damage of the coronavirus. Moreover, cheaper energy costs can help keep inflation gauges low enough to allow the Federal Reserve to remain highly accommodative with monetary policy.
Sources: U.S. EIA, IEA, GasBuddy, Reuters, FRBSL