The national average for a gallon of gas has fallen below $4 for the first time since early March, a key psychological threshold for cash-strapped Americans even as inflation remains elevated.
The U.S. average dropped 2 cents overnight to $3.99, AAA reported Thursday, a 20% pullback from its June peak above $5. The run-up in gas prices earlier this year is tied to the Russian invasion of Ukraine and the ensuing turmoil in energy markets.
Relentlessly high inflation is the nation’s most vexing economic problem, prompting months of recession talk even as job growth has soared — U.S. employers added 528,000 jobs in July — and consumer spending has remained resilient.
But lower pump prices mean there’s less drag on the broader economy, as evidenced by federal data released Wednesday that shows inflation eased in July. Though overall prices remain elevated, climbing 8.5% year over year, they’ve moved away from the pandemic peak of 9.1% recorded in June, when the U.S. fuel average topped out at $5.02. The gasoline index fell 7.7 percent in July.
Crude prices that had been hovering near $80 a barrel in January had pushed past $120 by March, on fears the Russian conflict would curtail supply and disrupt energy markets. Pump prices soon followed, swelling nearly 20% roughly a week after the Feb. 24 invasion.
But oil prices have been cooling since early June, with West Texas Intermediate crude, the U.S. benchmark, hovering around $91 per barrel on Thursday. Fuel costs are now in line with what consumers and businesses were paying before the war.
Experts say the sell-off is largely driven by worries of a possible recession in several large global economies, which would crimp fuel demand.
Economists have been warning of a possible recession in the United States for months. Jeff Buchbinder, chief equity strategist for LPL Financial, said in a Monday note that he thinks the odds of a U.S. recession in the next year are “perhaps a coin flip or better,” despite the Labor Department’s blockbuster jobs reading on Friday. England’s central bank warned last week that Britain would enter a protracted recession by the last quarter of 2022.
The National Bureau of Economic Research has not declared the United States to be in a recession, even though economic activity has already declined for two consecutive quarters. Still, fuel demand is already down: As measured as a four-week moving average, it stood at 8.6 million barrels a day as of July 29, according to the U.S. Energy Information Administration. That’s 8.7% lower than a year ago.
Meanwhile, there is still a possibility that prices could turn around. OPEC, the group of oil-producing nations that includes Saudi Arabia, has only minimally boosted production despite entreaties from President Biden and other world leaders to remedy supply shortfalls.
Analysts also note that the main culprit behind higher gas prices — Russia’s war in Ukraine — is still in full swing, as well as the Western sanctions designed to punish Moscow. J.P. Morgan has warned that in a worst-case scenario — in which Russia retaliates by shutting down its supply altogether — the price of oil could go as high as $380 per barrel, more than quadruple what it is today.