Gas prices have now fallen for more than 100 days in a row. This has taken the average retail gas price in the U.S. down to $2.26 per gallon according to AAA, which is a price we haven't seen since May of 2009. Overall, gas prices are down 39% since topping out in April of 2014 at $3.70 per gallon. A dramatic drop in oil prices, which currently contributes nearly two-thirds to the price we pay at the pump, is largely credited with saving American drivers $14 billion at the pump in 2014. That's about $115 per household, or $43.75 for every man, woman and child in the country. However, if current oil prices persist then the average American could save $234 at the pump in 2015.
Oil's role at the pump
The price we pay at the pump is typically made up of four main components, which we can see in the graphic to the right. As that data shows about 62% of the price of gas in November (which is the latest data) was due to the price of crude oil that is refined into gasoline. That percentage, however, isn't fixed as it moves along with oil prices. When oil prices are well over $100 per barrel it pushes the price of gasoline higher as oil's portion of the costs can rise to 80% of what we pay at the pump. Conversely, as the price of oil falls so does its makeup of what we pay at the pump. In the early 2000s, for example, oil was only 36% of what we paid at the pump.
Taxes, refining costs, and the costs associated with marketing and distributing gasoline also play a role in what we pay at the pump. However, taxes in particular can differ dramatically from state-to-state and it's often quite noticeable on a long road trip. The average combined state and federal gasoline tax in 2014 was $0.49 per gallon according to the American Petroleum Institute. However, several notable states including New York, Florida, and California had higher than average state gas taxes while other states including Texas and Virginia enjoyed lower average taxes by $0.09 per gallon or more.
Why you could pocket an extra $234 next year
Because oil prices still make up the bulk of what we pay for each gallon of gas, its rapid fall should translate into big savings for drivers over the next year. According to AAA, as long as oil prices stay relatively low the average American could save up to $234 at the pump next year. That's upwards of $75 billion staying in the pockets of American consumers instead of being spent at the pump.
In fact, if current oil prices stabilize in the $50 per barrel range gas prices nationwide should drop another $0.10 per gallon over the next few weeks as gas prices don't fall as quickly as oil prices. That would allow gas prices to fall below $2 per gallon in as many as 11 U.S. states, which are those that currently have the lowest state gas taxes in the country.
Unfortunately, even if oil prices stabilize at around $50 a barrel that doesn't mean sub-$2 gasoline is here to stay for most Americans in 2015. Gas prices typically rise $0.30 to $0.50 per gallon during the spring refinery maintenance season, so, unless oil prices keep falling then it's quite likely that gas prices will head higher as the weather warms up. Still, this year's peak gas price could be as much as a dollar per gallon or more below last year's peak, which over the course of the year will really add up into big savings.
The fracking boom unlocked more oil than we ever dreamed and led to surging oil supplies at a time when demand has weakened due to efficiencies, demographic shifts, and a less-than-robust economy. Because of this we're now enjoying the lowest gas prices in five years with most Americans expected to save a few hundred dollars at the pump over the next year as long as oil prices stay where they are. That will leave each American family with more money that can be enjoyed by going out to eat more often, taking a nicer vacation, or, better yet, put toward your retirement. In fact, we have a retirement investing idea you won't want to miss as it could turn your meager savings at the pump into a real windfall down the road.