American motorists may finally catch a break at the gas pumps — just in time for the critical summer driving season. Prices for gasoline continue to inch downward as some of the geopolitical premium on the price of a barrel of crude oil begins to dwindle. So far, the U.S. average price of regular gasoline has dropped to just over $3.78 per gallon in the past two weeks. That’s down more than 12 cents from a year ago and more than 18 cents from its April peak.
However, that drop could just be the beginning.
According to AAA, prices at the pump this weekend should average about $3.66 a gallon. That’s certainly welcome news for the estimated 34.8 million drivers that AAA predicts will travel this Memorial Day weekend. The travel club forecasts that there’s plenty of room for prices to drift even further down.
Overall, falling prices gasoline prices at the start of summer is a huge positive development for consumers’ pocketbooks. The average American household will spend nearly $3,000 on fuel this year at current prices. So, any reduction in the average price will provide much-needed funds to power discretionary spending or to go toward household balance-sheet repair.
Falling prices also serve as a psychological boost. The $4 a gallon price point seems to be when most Americans “feel” like they’re getting squeezed.
So with the odds of seeing $5 a gallon gas this summer continuing to lessen, two questions remain for consumers and investors alike: How did we get here, and will the price drop last?
Iran Plays Nice, So Far
Over the last few months, geopolitical tensions stemming from the Middle East have kept the heat on the price of Brent crude, which winds up becoming a lot of the gasoline that fills Americans’ tanks, especially on the East Coast. The Arab Spring revolution in Egypt followed by the uprisings in Libya put pressures on global supplies. It took almost a full year for Italian energy giant Eni (NYSE:E) to restart pumping from its operations in Libya.
Perhaps the biggest Mideast threat to prices has been Iran’s continued saber-rattling. The nation’s uranium-enrichment programs are at the center of a global dispute, with Tehran denying allegations that it’s trying to build nuclear weapons.
In response to the nuclear threats, the U.S., European Union and a variety of other nations have imposed strict economic sanctions on Iran. In turn, Iran has continually vowed to close the Persian Gulf’s vital Strait of Hormuz. No wonder crude prices rose so sharply earlier this year.
However, Iran may be finally starting to play nice. This Wednesday in Baghdad, Iran along with six major powers began talks and exchanged proposals aimed at ending the dispute. International Atomic Energy Agency officials expect to sign a deal with Tehran soon in order to start an investigation into the Islamic nation’s nuclear activity. As tensions with Iran have come down to just a simmer rather than a boil, much of the geopolitical premium on crude prices has been erased.
At the same time, other factors are sending crude — and ultimately gasoline — prices downward. First, the U.S is awash in oil — at least the middle of the country is. Thanks to increased production from the Canadian oil sands, North Dakota’s Bakken shale and fields across the Midwest, oil has been piling up in nation’s storage hub of Cushing, Okla.
As we’ve said before, energy prices are about logistics as much as demand. With inadequate pipeline capacity to transport that glut of crude, refineries on the U.S. coasts have had to buy more expensive imported Brent crude. However, with Enbridge’s (NYSE:ENB) Seaway pipeline reversal fully underway, as well as other logistics projects in the works, alleviating much that glut of crude is becoming a reality.