WASHINGTON (AP) — Iran launched missiles at a U.S. military base in Qatar on Monday, threatening to stoke a wider conflict in the Middle East, a region that supplies the world with about a third of the oil used globally every year. That same day, benchmark U.S. crude tumbled more than 7%, one of the biggest single day sell-offs this year. The following day, the same thing happened, driving crude prices down by double digits this week.
The seemingly illogical tumble in energy prices highlighted a new global reality: the world is awash in oil.
Gasoline prices barely moved this week, but experts say motorists will likely see prices at the pump begin to fall, perhaps as early as this weekend.
With the situation in the Middle East still volatile, Iran could try to block the Strait of Hormuz off its coast, through which 20% of the world’s oil passes daily. While few expect Iran to do that because it would cripple the ability to move its own oil, the fact remains that there have been drastic changes in the 50 years since an Arab oil embargo hobbled the U.S. economy and sent energy prices skyrocketing.
Following is a quick rundown of the new forces on supply and demand that have reshaped the global energy landscape, and what you can expect to see as far as prices at the pump this weekend.
PRICES AT THE PUMP
Technical innovation in the last two decades has upended global energy markets and made the U.S. the world’s top oil producer, surpassing even Saudi Arabia in 2018. It’s contributed to an extended surplus of oil, and that has consistenly driven prices lower.
Gas prices have been in broad decline for roughly three years. That has remained true even during traditional periods of high demand, like the summer travel season just now kicking into high gear.
Part of the reason, according to Patrick De Haan, the head of petroleum analysis for GasBuddy, is that the U.S. announced aggressive tariffs against its trading partners at around the time of year that U.S. gas prices usually begin to rise. That suppressed demand, for both households and businesses, due to anticipation of economic fallout from a broader trade war.
And prices are likely to begin falling again, and fast. Gas stations bought their fuel supplies before crude prices slumped this week, so motorists have not seen gas prices decline due to a typical lag between oil and gasoline prices.
“I think that the national average will probably cease to increase in the next 24 to 48 hours,” Patrick De Haan, the head of petroleum analysis for GasBuddy said Tuesday. “Then it should stabilize for maybe a day or two and then we should start to see prices — at least the national average — to start falling this weekend.”
On Wednesday, the average retail price for a gallon of gas in the U.S. was $3.23, down from $3.47 a year ago. In June of 2022, the average U.S. price for a gallon of gas eclipsed $5, an all-time high, according to the auto club AAA.
SUPPLY & DEMAND
The U.S. is producing record volumes of natural gas and crude. Production has reached such high levels that energy companies are shutting down drilling operations because pulling crude from the ground with prices so low doesn’t make financial sense.
The odds of a U.S. oil company taking action after President Donald Trump’s this week implored them in a social media post to “drill, baby, drill,” is slim to none.
U.S. drilling activity began to slow last year and the number of active oil and gas rigs in the U.S. fell last week to 554, the lowest level since November of 2021. That’s a decline of about 19% from a year ago at this time.
That might lead to short supply and higher prices if it weren’t for producers outside of the U.S. that are currently boosting production. The type of drilling operations run outside of the U.S. can be less nimble and harder to shut off, and revenue demands much greater.
The OPEC+ alliance of oil producing nations this month announced that it was increasing production. This week, S&P Global Commodity Insights raised its 10-year production forecast for the Canadian oil sands, expecting production to reach record levels this year.
Yet these supply forces are colliding with the reality of weakening global demand for oil.
According to the International Energy Agency, oil’s share of global energy demand in 2024 fell below 30% for the first time ever. Overall energy demand has increased, but more so for natural gas and other energy sources, the IEA said in its most recent annual report published in March.
Oil demand grew a meager 0.8% last year, according to the IEA.
Part of the reason is new technology in transportation.
Global sales of electric cars climbed 25% last year, according to the IEA, just the most recent example of the mainstreaming of EVs. One of every five vehicles sold last year was electric. That’s one of the reasons demand for crude is falling, while demand for alternative forms of energy continues to rise. Additionally, fossil fuel powered engines are becoming increasingly efficient, whether they are traveling through the air, by sea, or on the road.
And right now, the same anxiety that has led households to cut down on trips in the car is also impacting airlines, which have reduced their projections for air travel this year due to potential trade wars and the economic unease that comes with them. That has added further downward pressure on oil prices.
RISE OF ALTERNATIVE ENERGY
New energy technology of course reaches beyond transportation.
According to the IEA, 80% of the increase in global electricity generation last year was provided by renewable sources such as wind and solar.
As more alternative energy sources are established, including natural gas, the demand for crude falls. Demand for natural gas grew 2.7% in 2024, while oil demand rose just 0.8%, down from a 1.9% increase in 2023.
Major U.S. technology companies have begun investing heavily in nuclear power to meet their energy needs for artificial intelligence and data centers.
Facebook parent company Meta, Microsoft, Amazon and Google have all announced investments in and partnerships with nuclear power companies in the past year.
