If there is one silver lining in the slowing economy, it may very well be falling gas prices. Prices at the pump, at sustained historic highs over most of the past year, have finally showed some signs of relief with the price for one gallon of regular unleaded gasoline falling on average one penny per day for the past four weeks.
The average price for a gallon of regular unleaded gasoline, nationwide, now stands at $3.41, this according to AAA. This decrease is down from over $4 a gallon back in May.
Analysts are anticipating that the price will drop even further with the weakening economy. Falling prices at the pump follow declines in the price of oil as well. Brent crude fell $1.92 to $99.79 in London trading, marking the first time the benchmark crude has fallen below $100 since February.
Competing Market Forces
According to experts, the decline in both oil and gasoline prices are strictly a matter of competing market forces, increasing supply, and dwindling demand. A rise in the value of the dollar and easing unrest in the Middle East have also added to the decrease in the price of oil and gas.
“Oil wants desperately to grind down,” said Jan Stuart at Credit Suisse. “Oil is moving down as part of a broader trade of equities, debt markets and commodities driven by a panicky feeling that the macroeconomic situation is deteriorating fast.”
The weakening world economy has not only slowed demand in the United States and Europe, but China as well.
Slowing Global Activity
In the United States, consumption of gasoline was off 2.5% in September from a year ago, this according to MasterCard. Declines ranging anywhere from two to three percent have shown in the recent 4-week moving averages, starting with the week ending August 5. This decrease is a direct reflection of the state of slowing global activity.
Another reason for the drop in oil prices: the European financial crisis. The crisis has weakened the euro considerably. Oil and other worldwide commodities are denominated in US dollars, so when foreign currencies fall in value against the dollar, commodities like oil drop in value as well. Although oil stock globally is still tight, supplies have eased a bit in recent months.
Libya a Key Factor
Oil production in Libya is now coming back on line as the civil unrest winds down there. Several European countries including France get the lion’s share of their oil supply directly from Libya, so as the crude begins flowing from the African nation again, prices have declined in reaction to the increase in global supply. Libya contributes as much as half a million barrels of crude per day to the global economy.
Rumors are also beginning to circulate that the Iraqi oil field are now coming online and Iraqi oil production will soon begin to flow into the world oil supply.
As a reference, experts point to historical data showing that decreases in the price of oil in increments of $10 have shown economic growth of up to .2 to .3%. Such a drop in oil prices is bound to help the strapped airline industry. Even food prices are dependent on the price of oil. The cost of transporting food from grower to supplier is a major factor in the overall cost of food. Any business where goods must be transported is affected by the price of oil, and gasoline.
The current average price for a gallon of gasoline, at $3.41 per gallon, is still $.70 above where it was a year ago, but 15% off this year’s highs of nearly $4. Experts are predicting that the price for a gallon of gasoline will continue to fall, as low as $3 per gallon nationally in the coming months.
“That will be the launching pad for 2012, and we will overreact in the spring and prices will flirt with $4 again,” said Tom Kloza of the Oil Price Information Services, adding that normally gas prices go up in the summer driving months, and down for the winter season.