Economic Problems – Less Pain at the Pump, More Pain for you Everywhere Else

The price of oil fell sharply today, thanks to the collapse of investment house Lehman Brothers, and the growing concern that the United States is only in the beginning stages of a prolonged economic downturn.

After falling to as low as $94.13 per barrel, the price of oil closed the trading day at $95.71, which was down $5.47 from Friday’s close.  Today’s closing price represents oil’s lowest price since back in February, and means the value of oil has fallen nearly 35% since hitting a record high of over $147 back in mid-July.

Despite today’s drop in the price of oil, gasoline prices continued to rise across the country thanks to damage caused by Hurricane Ike.  While refinery capacity is slowly coming back up, at the height of the shut downs and evacuations, nearly 25% of the United States’ fuel refinery capacity was out of commission, causing gas prices to climb significantly higher for the first time in over two months.

WHAT DOES ALL OF THIS MEAN FOR YOU?

Assuming there is only minimal damage to the Gulf’s gasoline refineries, we should see the price of gas resume its slide back towards the $3.25 to $3.50 range.  A drop to prices within this range would follow the usual price declines that come towards the end of summer and into late autumn.

However, there is also the possibility that, barring another major storm coming through the Gulf Coast region, we may see gas prices drop even lower.

Obviously, this is good news, right?  Not necessarily.

While it would be nice to have gas prices drop back below $3 per gallon, chances are if prices get that low, it’s because the American economy has taken another turn for the worse.  As nice as it would be to go back to $30 fill ups, it’s probably not worth the slight relief at the pump if its due to a severe economic downturn.

Think about it.  Do you really want the price of gas to drop to $2.75 a gallon if it means unemployment climbs to seven or eight percent, salaries fall, and you’re burning through your emergency cash just to stay afloat? Probably not.

I’m sure I speak for more than myself when I say I’d gladly pay an extra $15 bucks a week at the gas station if it meant the economy was strong and I wasn’t worried about losing my job.  After all, it’s a lot easier to pay for $50 fill ups when you’re getting paid than it is to pay for $30 fill ups when you’ve got nothing coming in.

Comments

  1. You don’t really make it clear as to why the drop in gas prices would continue to drive the economy down. From what little i understand this would only help the economy. Allowing people to spend their money on other consumer goods. Which, in effect, would help the economy.

    Though maybe I am missing something… 😀

  2. I’m not saying lower prices would drive the economy down, rather significantly lower prices are a symptom of an economy that has taken a turn for the worse.

    Let’s take this step by step:

    1) Oil and gas prices (Ike withstanding) are falling

    2) Much of the reason behind the decrease in price of oil and gas is due to falling demand and a weak American economy.

    3) The more the economy weakens, the more demand for gasoline and oil will fall

    4) Assuming the supply of oil and gasoline stays the same, prices will continue to fall if demand continues to fall

    5) The further prices fall, the further demand has fallen

    6) In going back to point 2, the further demand falls, the weaker the American economy has become

    Sorry I didn’t get this point across.

  3. Nicely done, Brian.
    You’ll find cause, effect and solutions on my website.

  4. It seems to me that a weakening US economy would drive gas prices up, not down. While we would see a marginal decline in demand, we would also see a much larger decline in the value of the dollar. If the dollar drops, oil prices go up.

  5. It seems you are basing your predictions on only one cause of gas prices changing. Gas prices did not go up solely because of demand. They went up for a number of reasons:

    1. Demand for summer driving
    2. Inflation of US Dollar
    3. OPEC Overpricing
    4. Speculation
    5. Recent hurricane issues affecting refineries

    Now the decrease in gas prices is going to be caused by quite a few things including the following:

    1. Less demand due to summer ending
    2. OPEC scaling back price hikes because of offshore drilling talk
    3. Self correction on price because of over speculation
    4. Restoration of refineries and oil platforms

    So I would say this article is poorly explained initially as well as poorly thought out. Not sure how this made it so far on digg…

  6. Okay, but why?

    How does a weakening economy relate to falling gas prices?

    Don’t lower gas prices mean the dollar is getting strong vs. other worldwide currencies?

    Isn’t a strong dollar good for our economy? Wouldn’t a strengthening dollar attract investors back into domestic markets? And, I thought that would also attract foreign investors as well.

  7. You’re all right – I did a poor job of articulating my point. I’ll post some sort of update better explaining myself.

  8. Thanks Brian, I’d really like to get a deeper explanation for all of this. I’m interested in learning more about it.

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