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December 3rd, 2008

Cheap Gas Prices: Sweet Relief?

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Crude-oil futures dropped as low as $46.82 a barrel yesterday, the lowest level since May 2005 — a decline of over $100 since oil prices peaked in July at $147.27 a barrel. Yet, what continues to seem like good news to consumers has left some economists skeptical:

“The negative wealth effect [among households] is far outweighing any benefit that lower gas price is having on discretionary spending,” said Chris Hyzy, chief investment officer for U.S. Trust, the private wealth management unit of Bank of America.

Yet others are quick to point out the substantial savings cheap oil prices have provided consumers:

Every 10 cent drop in the price of gasoline is the equivalent of a $12 billion tax cut, calculates Nariman Behravesh, chief economist with IHS Global Insight, the forecasting firm.

“So the drop from around $4 a gallon to less than $2 is the equivalent of a $250 billion tax cut, more or less,” he said.

Today’s national average for a gallon of gasoline is $1.81 — $1.25 less than last year’s average. In 2006 the national average was $2.25, and $1.14 in 2003. What does the future hold for gas prices?:

Behravesh is predicting oil will end 2009 at about $50-55 and then settle in the $70-80 range for the next couple of years after that.

We may yet to see a meaningful change in the price of crude oil until there is a significant increase in world-wide consumption, said HSH Vice President Keith Gumbinger.

Consider this: just because the price of crude stays low through the coming months or year doesn’t mean the prices for the products that are produced from it (gasoline) will do the same. Remember our post from Monday on gas taxes? They could be coming sooner than you think. A Federal or state gas tax, carbon tax, or oil tax could all easily raise the cost of gas even if crude futures continue to fall.

So far gas prices haven’t been much of a saving grace against all the other negative economic forces out there, but they have certainly provided consumers with a little extra cash.

Readers: Have cheap gas prices allowed you to save any of your income that would have normally been spent on gas if prices were still over three dollars a gallon?

How Long Before States Begin to Raise Gas Taxes?

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2 Responses to “Cheap Gas Prices: Sweet Relief?”

  1. Gene Chase Says: December 12th, 2008 at 12:27 pm

    It’s supply and demand. There is a simple reason why gas prices have dropped. Over a million people have lost their jobs and are not driving to work or driving anywhere. There is an oil surplus and OPEC is in a shambles. Jobless people may be on the internet trying find a job, filling out applications or signing up for retraining for jobs that are still needed. They are not driving.

  2. Tim Manni Says: December 12th, 2008 at 12:36 pm

    Gene,

    We completely agree! If consumers want to keep gas prices down, they need to continue to limit their driving. You made a really good point though, much of that reduced consumption is a result of Americans who are strapped for cash for many reasons, job loss being one of the main reasons.

    Thanks for reading and leaving a comment,

    Tim

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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