Personal Finance: Welcome relief at the gas pump

BY THE NUMBERS• $3.37: Average price per gallon of gas nationwide Tuesday• $3.45: Average price per gallon of gas nationwide a month ago• $3.54: Average price per gallon of gas nationwide a year ago• $3.16: Average price per gallon of gas in Tennesee on TuesdaySource: Gasbuddy.com

photo Chris Hopkins

Finally, some good news on gas prices. With the end of the summer driving season, motorists in the Tennessee Valley should soon be filling up for less than $3 per gallon, and will probably see even lower prices by Halloween.

While many factors are contributing, the remarkable surge in domestic oil production is the principal force behind lower gas prices. And given current trends in production, the future looks even better.

After peaking in 1970, American output of crude oil declined steadily, falling nearly in half by 2008. But thanks to new technologies like horizontal drilling, U.S. crude production has surged to levels not seen in 25 years and continues to increase at an unprecedented rate. According to a forecast from the U.S. Energy Information Administration, 2015 output will eclipse the 1970 peak, leading many analysts to expect net imports to fall to zero over the next decade. This development was unimaginable just five years ago.

Evidence of the newly abundant supply can be seen in recent price action. Despite the geopolitical turmoil in the Middle East and Ukraine (critical energy-producing areas), the wholesale price of crude oil has declined by 14 percent since July and is closing in on $90 per barrel. Clearly the market is less concerned about possible supply disruptions with all the new North American oil coming on line.

Current laws dating back to the oil embargo days of the 1980s prohibit most exports of American crude oil. So with supply tanks, pipelines and rail cars overflowing, U.S. refineries are running wide open to turn the Black Gold into refined products like gasoline and aviation fuel which can be exported. And although the U.S. has not seen a new refinery built in over 30 years, refining capacity is greater than ever through expansion and modernization of existing facilities. According to the EIA, domestic production of gasoline hit an all-time record 10 million barrels per day in April.

In fact, over the past four years, the United States has moved from being the world's largest importer of refined products to the world's largest exporter of such products, selling over 1.5 million net barrels per day to foreign buyers, thanks again to the unexpected bounty in domestic crude oil supplies.

Gasoline is a global commodity whose price depends on supply and demand in international markets. However, growth in demand for the motor fuel has slackened of late given slowing economic growth in Asia, Europe and Latin America. Meanwhile, despite modest but consistent output growth in the U.S., consumption of gasoline has actually declined by about 6 percent (roughly 8 billion gallons) per year since 2007 due largely to increased energy efficiency.

Greater supply and weaker demand growth leads to lower prices, which is good news for American consumers. Thanks to this fortuitous confluence, gasoline prices have declined nearly 15 percent since June, and are likely to fall another 10 to 20 cents per gallon by the end of October, according to AAA.

A smaller bite at the pump translates into a bit more disposable income to spend elsewhere. Retail sales rose more than expected in August, according to the Commerce Department, and consumer confidence regarding the economy continues to improve, due at least in part to the lower cost of filling the tank. And it's likely to get better still in the months ahead.

Christopher A. Hopkins, CFA, is a vice president for Barnett & Co. in Chattanooga.

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