Gasoline falls below $4 a gallon as oil drops and Iran war hopes build

The national average for a gallon of regular gasoline fell to $3.978 on Sunday, dropping below $4 for the first time in weeks, according to AAA.

The price is down 17 cents from a week ago and 39 cents from a month ago, when the average stood at $4.367. The decline tracks a broader slide in oil prices that began after President Donald Trump signaled the war with Iran could be ending “fairly soon,” CNBC reported. Brent crude settled below $90 a barrel on Tuesday for the first time since August.

The relief at the pump is real but relative. A year ago, before the Iran war began, the national average was $3.071. Gasoline today costs 91 cents more per gallon than it did then. For a household that drives 12,000 miles a year at 25 miles per gallon, that is an extra $437 a month compared with a year ago. The price has come down from its wartime peak, but it has not come down to where it was before the fighting started.

The drop has been driven by three factors. Crude oil has gotten cheaper as traders bet on a diplomatic resolution to the nine-month conflict. Gulf oil flows through the Strait of Hormuz have largely recovered after months of disruption. And refining capacity, which was strained by the war and Houthi attacks on Saudi Arabia, has started to normalize. Diesel has fallen too, down to a national average of $6.157 from $6.288 a week ago, though diesel remains well above its year-ago level of $3.739.

The timing matters for the Federal Reserve. The central bank is fighting inflation that the Iran war helped create. Consumer prices rose 0.4% in October, more than expected, the Bureau of Labor Statistics reported Tuesday. Energy costs were a big part of the inflation picture all year. If gasoline keeps falling, the November and December inflation reports could show softer energy readings, giving the Fed a reason to pause its rate hikes rather than raise again in December.

The political dimension is hard to separate from the economic one. Voters cited the cost of living as their top concern in last week’s midterm elections, and Republicans lost both chambers of Congress in part because of high gas prices and the war that drove them. Trump promised on the campaign trail to slash energy costs, and gasoline instead soared to near-record levels during his first year in office. The price drop below $4 gives Trump something to point to, but the comparison to a year ago, when gas was $3.07, undercuts the claim.

State prices vary widely. California remains the highest in the continental U.S. at over $5 a gallon. Hawaii is above $5.60. On the other end, several Gulf Coast states are below $3.50, benefiting from proximity to refineries and lower state taxes. The national average masks regional pain that is still acute in the Northeast and West Coast.

AAA’s data shows the decline has been accelerating. The average fell 12 cents in the most recent week alone, the auto club reported. If that pace continues, the national average could reach $3.85 by the end of next week, a level not seen since before the war escalated in March. But the pace depends on oil staying below $90, and oil depends on Trump not restarting military strikes against Iran. Both are uncertain.

The drop is also seasonal. Gasoline demand typically weakens in November as summer driving season ends and refineries switch to winter-grade fuel, which is cheaper to produce. Some of the decline at the pump is the market doing what it always does this time of year. The question is how much of the drop is the Iran de-escalation and how much is just autumn. If oil goes back above $90 when Trump strikes again, the seasonal tailwind will not be enough to keep gasoline below $4 through the winter.

What I think

The price drop is good news, and it is probably temporary. Oil is below $90 because Trump said the war is ending. Trump has said that before. He said it in June, and strikes resumed in July. He said it in September, and strikes resumed in October. The market keeps buying the declaration and ignoring the pattern. When the next strike happens, the premium comes back, and gasoline goes right back above $4.

The year-over-year comparison is the number that matters. Gas is 91 cents more expensive than it was a year ago. That is the cost of the Iran war to the American driver, and it is the cost that voters held Republicans accountable for last week. A drop from $4.37 to $3.97 is a relief, but it is a relief from a price that should never have been that high in the first place. The war created the inflation, the inflation created the political backlash, and the political backlash created the Democratic majority that will take office in January.

If the Fed pauses rate hikes because gasoline is falling, that is the right call. The economy does not need higher rates right now. Households are carrying record credit card debt, auto loan delinquencies are rising, and the personal savings rate is below 4%. Another rate hike would squeeze consumers harder for an inflation problem that was caused by a war, not by wage growth. Gasoline below $4 gives the Fed the cover to wait. The Fed should take it.