3 Factors May Thwart 2016’s Low Gas Prices

GasBuddy’s annual forecast projects even lower prices—assuming all goes smoothly

Gas Prices Sign

GAITHERSBURG, Md. -- Like last year, but better. That’s the gist of the retail gas-price forecast for 2016 from GasBuddy, which expects a year that will beat 2015’s national average by more than a dime per gallon.

In its annual Fuel Price Outlook, gas-price intelligence service GasBuddy projects a national retail average of $2.28 per gallon for 2016, down 12 cents per gallon (CPG) from 2015’s average and the fourth annual decline since 2012. This would mean a $20 billion savings for consumers in gasoline costs from 2015.

“Just like every year, however, there may be pain at the pump or hot spots that lead to skepticism about the future of fuel prices, but these hot spots will be relatively short-lived and only serve as a temporary roadblock to another year of affordable fuel prices,” said Patrick DeHaan, head petroleum analyst at Gaithersburg, Md.-based GasBuddy.

The year is projected to start with an annual low point of $1.97 per gallon for January, and will gradually peak to $2.62 per gallon in May as refineries shift from winter to summer formulations of gasoline to meet Environmental Protection Agency (EPA) mandates. The retail average will drift down again before reaching $2.01 for December, GasBuddy projects. This seasonal rise has actually decreased in size from the large hikes common only five to 10 years ago. According to GasBuddy, this increase has averaged 53 CPG since 2012.

The projected national average for diesel in 2016 is $2.16 per gallon, GasBuddy said, hitting a peak December.

Which factors could heat up gas prices even more in 2016?

1. Increases in state gas taxes. While it is highly unlikely that Congress would pass an increase in the federal gas excise tax during an election year, many states are revisiting their tax rates to raise additional revenue for transportation infrastructure.

And as gas prices drop, taxes are contributing an even greater share to the average retail price. For example, in Pennsylvania, the state average was $2.61 per gallon on Dec. 31, 2015—with 73.7 CPG of it a combination of state and federal gas taxes.

“While it's encouraging to see retail gas prices at the low end of the spectrum right now, consumers should keep informed about proposals in their states to raise fuel taxes either now or later,” said Gregg Laskoski, senior petroleum analyst at GasBuddy, noting that 18 states already pay more than 50 CPG in combined federal and state taxes.

2. The rebalance of supply and demand. OPEC thus far has shown no signs of easing production as it seeks to regain market share from its North American competition. Meanwhile, crude inventory in the United States has swelled to an 80-year high. But can demand make enough gains to put a dent in supply and pressure prices?

“Driving and car purchasing habits have been boosted by the low-price environment, with more miles being driven with less efficient cars spelling higher demand for gasoline,” said Will Speer, senior petroleum analyst at GasBuddy. “2016 will be an important year to see if stronger U.S. and global fuel demand can provide support for sagging commodity prices.”

3. The usual volatility drivers. Refinery downtime—anticipated and not—bad weather and geopolitical chaos can all heat up gas prices on a local and national level. On the refinery side, the Great Lakes states and West Coast are especially susceptible—consider the Midwest price spikes after outages at BP’s Whiting, Ind., refinery this past summer for example, or the many that have plagued California this year.

And while 2015 passed with no major hurricanes, it doesn’t take a big storm to play havoc with gas prices, especially when it impedes on shipping. Note Florida’s gas price spike in February 2015 after fog overwhelmed Houston shipping lanes.

“The good news is that when all these factors are weighed,” said GasBuddy senior petroleum analyst Jeff Pelton, “gas prices should still enjoy lows on par with 2015.”

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National Average Price of Gasoline 2012-2016

Source: GasBuddy