For the first time since May, oil prices in Virginia are dropping. The price of a barrel of crude oil this week dropped below $100. While this is great news for increasingly cash-strapped motorists, economists worry that the price drop is a result of recession fear impacting the market. So let's talk about it.
Gas prices are predominantly determined by the price of crude oil, the supply of which has been particularly unpredictable this year. For instance, according to the White House, the war in Ukraine has decreased Russian oil supply by 850,000 barrels a day — about 7.5 percent of its overall output. This alone is estimated to have increased gasoline prices by more than $1.70 per gallon.
But the Russian invasion isn't the only factor. Analyst Frank Luntz stated how “even though demand is nearing pre-pandemic levels, [oil] producers are still gun-shy about increasing production. In April, the Organization of the Petroleum Exporting Countries (OPEC) fell short of its targeted production increase by 2.7 million barrels a day.”
And yes, U.S. suppliers are ramping up our domestic production of crude oil, but their output just hasn't been enough to combat the international shortfall. The New York Times reported that the biggest reason for this is that “ U.S. energy companies and Wall Street investors are not sure that prices will stay high long enough for them to make a profit from drilling lots of new wells.” And they may be right. July is historically the most traveled month of the year… but crude prices are dropping…and with it, prices at the pump. AAA reported last week that Virginia is one of the top 10 areas in the Nation that saw the biggest drop in gas prices (-$0.11/gallon) last week. Maryland also made the list with a total drop of -$0.10/ gallon. So, what's going on?
For the last few months experts have predicted the U.S. economy might be heading towards a recession. We've witnessed the impact of the idea of a recession has had on consumer spending, which makes up more than two-thirds of the U.S. economy. The newest indicator is lower consumer demand for gas.