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Apparently I didn’t do a very good job writing the previous post, in which I tried to explain that falling gas prices may not be a good indicator for the economy.
I can see why what I wrote may have been misinterpreted. In going back and looking at the post from the point of view of someone other than the author, I definitely saw how what I was trying to say didn’t really come across the way it was meant to.
So, I’m going to try this again.
Falling oil and gas prices may not necessarily be a good thing. The reason being, one of the main contributors behind the falling prices has been demand destruction – i.e. we are using less gas and oil.
Much of decrease in demand has been brought about thanks to a slowing economy. Businesses aren’t expanding production, people are driving less and not flying as much, etc. These things I just mentioned are indicators of a weak economy.
The commodity traders who essentially set the market price for oil – and in turn, gasoline – have picked up on this, and are anticipating demand to fall even further. In short, this means they see the economy becoming weaker in the coming months.
Thus, in anticipation of a further weakening of the economy and continued decreases in demand, oil and gasoline prices have been pushed lower. That’s it.
I wasn’t trying to say that gas at $2.50 per gallon was bad for the economy. What I was trying to say was if gas prices fall that low, it probably means demand has eroded so far that the economy is in really bad shape.
Hopefully I was able to get my point across a little better this time around. If not, please leave a comment or question and I will try to explain my thoughts further.
{ 1 comment… read it below or add one }
After today’s drop, does this now make sense to anybody? The price of oil dropped because of the perceptions that the U.S. economy isn’t sound and is on the verge of collapse.
Even if this isn’t truly the case market perceptions many times are more powerful than market realities.