Falling Gas Prices Are an Early Christmas Gift for the Economy
Oct 5th 2011 8:45AM
Updated Oct 5th 2011 4:19PM
Across the U.S., the prices of a gallon of regular gasoline was $3.408 on average Tuesday, according to AAA. That's a sharp drop from the $3.662 a gallon price that prevailed a month ago. Gas prices have finally begun to reflect the falling price of oil, which is down from nearly $100 a barrel in July to less than $78 now.
Oil prices have declined primarily due to concerns that a rapid slowdown in the global economy will undermine demand. That widespread weakness should continue to put downward pressure on gas prices as oil moves through refineries, a process that takes weeks.
Premium gas has fallen, too, from $4.265 to $4.024 over the past month, and should dip below the $4 a gallon barrier soon. That's good news for owners of expensive sports cars and luxury vehicles.
The general theory is that low gas prices help stimulate the economy: As household expenses for driving fall, that money gets reassigned to other purchases, boosting overall demand. That's almost certainly true. The Department of Transportation and the Energy Information Administration report the average U.S. household purchases slightly more than 1,100 gallons of gasoline per year. With the American median household income just below $50,000 before taxes, fluctuations in the price of gas meaningfully affect the ability of consumers to spend or, alternatively, save or pay down debt.
This gas price decline couldn't come at a better time for the U.S. economy. The holiday sales season will begin within a few weeks. Many retailers count on sales in the final two months of the year for all of their annual profits. These retailers add jobs based on revenue forecasts, and many large retail firms have already done so. Their ability to keep those people employed beyond the end of the year will depend on whether shoppers fill malls and stores between now and year's end.
Low gas prices won't keep the U.S. out of a new recession -- but they'll help.