The U.S. economy may soon receive some much-needed stimulus in the form of an unexpected drop in prices of gasoline.
As sure as Memorial Day heralds the return of the peak driving season, that’s how quickly gasoline prices follow. As a matter of fact, the conventional wisdom has it that gasoline prices usually go up together with both temperatures and consumer demand.
This rise usually begins to taper off come Labor Day. That’s when vacationers return to work and resume their normal driving patterns.
But the current year appears to be shaping up somewhat differently. According to the Energy Information Administration, prices at the pump are going to fall from today’s levels. This forecast is based on crude-oil production (which is up) and global demand (which is down).
Rising oil production has boosted U.S. crude-oil inventories to some 398 million barrels. That’s the highest level since way back in 1931. On the other hand, demand is declining, both secularly and cyclically.
Near-term, the difficulty people have in finding jobs means less driving. And because many jobs are low-paying, those who are employed turn to mass transit, which is cheaper than driving a motor vehicle.
Longer-term, demographics have depressed demand. The millennials and other young people hardly drive at all, while on the other end of the age spectrum, as people get older and retire, they tend to drive less.
Also cutting into demand is technology prompted by government mandates regarding fuel economy for cars and trucks.
Not only do today’s gasoline engines sip far less fuel than their older counterparts, but many also come with a setting that defaults to the economy mode when started. This means the vehicle starts moving in a higher gear, and when it stops moving, the engine shuts down. And of course, let us not forget hybrids, which combine gasoline with some form of electric propulsion.
Besides falling counter-seasonally, gasoline prices are down compared to this time last year. Indeed, in many areas gas prices are the lowest they’ve been since 2011. This reflects demand that has been declining since reaching a peak in 2007.
If this trend continues (meaning that refinery production isn’t cut because of war or a hurricane), it bodes well for the fledgling recovery. A drop in prices of such a necessity as gasoline is like a tax cut. Each penny decline in gasoline puts $1 billion back into people’s pockets — money that almost certainly will be spent.
This could break the logjam that’s been holding back economic growth.
Up until now, employers have been reluctant to hire until demand improves. For their part, consumers have been hesitating to spend until they are sure that job prospects are getting better.
These petrodollars should give business the confidence it needs to step up hiring, which, in turn, will encourage consumers to boost their outlays even more.
In other words, thanks to falling gas prices, the U.S. economy will go from a vicious cycle to a virtuous cycle.
[by Irwin Kellner, writing for MARKETWATCH]
As always, posted for your edification and enlightenment by
NORM ‘n’ AL, Minneapolis
NORM ‘n’ AL Note: If you want to start saving dramatically on gas and diesel — by getting FREE fuel — please visit GAS-CARDS.US.