As Oil Prices Fall, What's Happening To Gas Prices? Don't expect cheaper prices at the gas pump right away. It will take some time for cheaper crude to make its way through refineries to local service stations. And even though the economy is improving, demand has not returned to previous levels.
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As Oil Prices Fall, What's Happening To Gas Prices?

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As Oil Prices Fall, What's Happening To Gas Prices?

As Oil Prices Fall, What's Happening To Gas Prices?

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  • <iframe src="https://www.npr.org/player/embed/136069839/136110404" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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LIANE HANSEN, host:

This is WEEKEND EDITION from NPR News. I'm Liane Hansen.

The soaring price of gasoline has been a source of public frustration from coast to coast. According to the American Automobile Association, the national average price for regular gas is now three cents shy of four dollars a gallon. Coming up, one analyst says the worst is over.

But, first, oil prices took a steep dive this week, falling more than 10 percent in just a few days, but that's not reflected at the gas pump yet. Demand is an important element in petroleum prices.

NPR's Jeff Brady reports that demand for gasoline in the U.S. peaked several years back and almost no one in the industry thinks it will reach that level again.

JEFF BRADY: Gasoline demand in the U.S. is on the decline for several reasons. Certainly price has something to do with it. At a national average of nearly four dollars a gallon, people are thinking twice about the trips they take. And some aren't changing their habits.

(Soundbite of people talking)

BRADY: We're on public transportation in downtown Denver. Among the passengers is Sherry Palmer who started a new job downtown in February.

Ms. SHERRY PALMER: It's a no-brainer not to take the light rail. It would be crazy coming from Parker and not to take it.

BRADY: Palmer lives about 35 miles away in the suburb of Parker. By leaving her SUV at home she's saving money every month.

Ms. PALMER: So I, to figure the numbers, I bet it saves me $200 dollars easily, not counting parking.

BRADY: And in the process, Palmer is buying about 55 fewer gallons of gasoline a month.

Professor DAN KAFFINE (Economics and Business, Colorado School of Mines): So that's a substantial change by one individual and that's, yeah, average it out with all the people who are making only small changes in their decisions.

BRADY: Dan Kaffine is an assistant professor at Colorado School of Mines where he studies how gasoline prices affect consumer behavior. He says individuals respond differently, but overall economists like him can predict how people will react.

Prof. KAFFINE: There is a broad literature out there that says that in the short run, a 10 percent increase in price, for example, will lead to roughly a one percent decrease in consumption.

BRADY: Beyond price increases, a poor economy also affects gasoline consumption. In 2008, as the economy suffered, the volume of gas sold fell by three percent. That's normal in hard times. What's not normal is what's happening now. Even though the economy is improving, demand has not returned to previous levels. That's a big deal because for decades gasoline consumption in the U.S. followed a steady course upward. This is something big oil companies have known for years.

ExxonMobil CEO Rex Tillerson confirmed that something had changed during a 2009 speech in Washington. He laid out the reasons for the decline.

Mr. REX TILLERSON (CEO, ExxonMobil): We think going forward that because of the emphasis on energy efficiency, ongoing improvements and vehicle mileage standards, as well as a changing mix over time of hybrid or hybrid-like vehicles, that motor gasoline demand is down. It's headed down. It's going to continue to head down.

BRADY: Tillerson said another factor is the increasing use of ethanol. There's a federal mandate to include more of it in gasoline. Today it makes up about 10 percent of the country's fuel supply. There's one more reason demand is likely to decline over the long term. As baby boomers grow older, they're going to drive less.

Mr. AARON BRADY (Associate Director, Global Oil, IHS CERA): We believe that gasoline demand in the United States has peaked.

BRADY: Aaron Brady is with IHS CERA, an energy consulting firm in Massachusetts. He has an economics background and is a good person to ask this question: If gasoline demand is headed down, then why are prices going up?

The key, says Brady, is that we're only talking about demand for gasoline in the U.S.

Mr. BRADY: The Chinas and the Indias of the world are growing very rapidly and that's tightening the supply/demand balance and it's causing prices to go up.

BRADY: Brady says despite what's happening in the U.S., oil consumption worldwide is growing faster than ever. Given that, four dollar a gallon gas might seem cheap in a few years.

Jeff Brady, NPR News, Denver.

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