Oil Glut Should Lead to Gasoline Prices Under $2/Gallon?

Currently, the national average for gasoline is approximately $2.69/gallon. West Texas Light Crude Oil is at $41/barrel. With that in mind, the price of crude oil has plummeted by 60% since its high back in 2014. And, the supply of oil continues to increase at a faster pace than demand. Oil producers from the U.S. to Saudi Arabia are all trying to gain market share no matter what the cost is. That should bode well for consumers at the pump. Basic economics indicate at a time when supply exceeds demand (See the following chart.) that producing countries would cut back production to eliminate the supply (glut) to better match up with demand. However, these producing countries need all the oil revenue they can get. Therefore, oil production (supply) will undoubtedly increase, not decrease. For instance, Saudis increased its daily oil production from 9.6 million barrels per day to 10.4 million. Iran has increased its production from 3.4 million barrels per day to 4.1 million.

Now, how did I extrapolate the current national average of $2.69/gallon to under $2? Take a look at the following chart that provides a ten-year look at crude oil prices and average gasoline prices:

In early 2009, crude oil was approximately $40/barrel and gasoline was approximately $1.60. And, guess what? Crude oil is approximately at the same price level per barrel as in early 2009. Therefore, given free market conditions of demand and supply, consumers "should" see gasoline under $2/gallon. Now, for the caveat. That would be governments' (federal and state) insatiable appetite for revenue. That, of course, would be your money! Currently, the total national average of federal and state fuel taxes are 48.88 cents per gallon. For my state of Missouri, the combined fuel tax is 35.70 cents per gallon. And, for the state that is dear to my heart, Wisconsin, the combined fuel tax is 51.70 cents per gallon. Where am I going with this? Yes, gasoline per gallon should already be at $2 per gallon and fast approaching $1.69 per gallon, given the current price of crude oil. However, all governments need additional revenue. And, what better revenue source to governments than increasing the fuel tax. If governments notice that you are not complaining while paying $2.69 per gallon, there logic will be to increase the fuel tax by an additional 25 to 40 cents when the gasoline hits, say $1.60 per gallon at the pump. The problem is that it is not their money but your money. That is, any additional savings at the pump should flow through to your disposable income, not the government coffers.