Just How Low Could Gasoline Go?

Video Transcript

Hi, this is Sean Brodrick for Uncommon Wisdom Daily.

Remember all those experts who were predicting that gasoline would rise to $5 a gallon? Well, they’re eating their words now, as prices at the pump continue to drop.

According to the U.S. Energy Information Administration, the average price for a gallon of regular unleaded is $3.79. That’s a drop of 15 cents in the past month, and now many analysts are forecasting a decline to $3 a gallon. When I look at a chart of gasoline prices, I notice that this year’s peak was lower than last year’s.

That’s good news, because those pennies at the pump can make a big difference. The rule of thumb is that every cent in the price of gasoline is equal to about $1.2 billion a year in consumer spending. So if we see prices drop 50 cents from their peak, that would be a whopping $60 billion pumped into the economy over the course of a year.

So will prices stay down long enough for that to happen? In order to know that, we have to look at what’s causing the recent movement in the market.

Earlier in the year, both gasoline and oil prices went higher amid fears that Israel would bomb Iran’s nuclear facilities, and potentially light a match to the whole Middle East. But as that fear has eased, so have prices.

Another cause of the recent decline is lackluster gasoline demand in the U.S. — off 6.6% from last year. If not for the fact that U.S. refiners are shipping more gasoline, diesel and other products overseas, the price drop would probably be even bigger.

Finally, the price of oil is falling fast. This is partly due to ample supply, and partly due to worries about the global economy. In addition to the stagnating U.S. economy, Europe is in political turmoil and China’s oil imports are dropping.

I do think Chinese demand will pick up again, because much of the recent decline is due to refinery maintenance. Meanwhile, I don’t see any end in sight for Europe’s problems. And anything could happen in the Middle East.

But what about the U.S.? Part of the decline in demand is because Americans are buying more fuel-efficient cars. But the more-worrying reason is that the economic recovery seems to be stalling.

Now, one reason for optimism is that lower oil prices can boost the economy — a $10 drop in crude could increase growth by up to three-tenths of a percentage point.

But it could work the other way too. If the economy continues to grind lower, and we fall into another recession, it will almost certainly mean much-lower gas prices. But nobody thinks that’s a good trade-off.

Several industries tend to benefit from lower oil prices, including airlines, shipping companies and other distributors. Restaurants should also do well because consumers will have more money to spend.

And if you’re an energy investor, just remember that lower prices tend to equal higher demand, which pushes shares of energy companies back up. So a price pullback could present a great buying opportunity for the long haul.

I’m Sean Brodrick for Uncommon Wisdom Daily. Thanks for watching.