Gas prices plunge: Beware what you wish for

AP Photo/The Citizens' Voice, Ralph Francello

(MoneyWatch) Gas prices have retreated and that's a good thing...sort of. The average for a gallon of regular gasoline is $3.38, according to AAA, down from a high of $3.93 in April. Sure it was terrible to pay an extra $0.55 a gallon to fill up your tank, but today's relief comes with an asterisk.

The run-up in prices at the pump was caused by a $35 rise in crude oil that occurred from $75 a barrel in October to $110 in April. The price of crude is responsible for two-thirds of the increase in gas prices.

Here's a breakdown of $1 at the pump as of May 2012, when the national average retail price of a gallon of regular gasoline was $3.73, according to the Energy Information Administration:

Gas prices are now just about where they were in October, when economists and investors worried that the European debt crisis would drag down the world economy. From October to the beginning of February, European fears simmered down; economic data improved; and Indian and Chinese demand increased for raw materials. The result was a near-20 percent bump in stocks and an increase in crude oil from $75 to $90 a barrel.

The last $20 increase to the April high occurred due to Iranian tensions, supply disruptions and of course speculators, who jumped on the bandwagon, trying to profit from the uncertainty. But then a funny thing happened: Worries about the Middle East cooled down, oil refinery glitches that crimped supplies were resolved and worst of all, global growth slowed down.

While many opined that European growth would stall due austerity measures and the ongoing debt crisis, the speed with which that contraction has spread to China, India, Latin America and the U.S. has been swifter than anticipated. When the world slows, the demand for energy drops and the result is that crude oil has retraced almost its entire move higher, trading at near $79/barrel.

But the trade-off for lower oil and gas prices is slow growth and tepid job creation. The U.S. economy expanded by only 1.9 percent in the first quarter and the past three months has only seen an average of 96,000 jobs created each month, well below the number needed to keep pact with new entrants to the workforce.

So sure, it's great to save money when we fill up our cars - economists say the drop in prices could put an extra $110 billion in consumers' wallets. But I'm guessing that most Americans would trade paying an extra quarter at the pumps for an economy that was firing on all cylinders, creating 200,000 jobs a month and prompting employers to hand out raises. You may want to reconsider wishing for lower gas prices back in April.

[dahnn]

The extra in people's pockets will most likely get spent anyway. $110B for consumers to spend on things other than gas and oil should also stimulate the economy and create additional jobs more than concentrating it in one mature industry (oil) it's associated infrastructure.

[ecommuter]

Personally I wish we (here in Portugal) were paying what the US was paying back in April! As it is we're currently paying the equivalent of **$7.50 per gallon**, and that's after 3 weeks of successive price drops (well, that's if you can call an average of 1.5 cents per week a reduction!)

Couple that with some of the lowest average salaries in Europe, sales tax at 23% (including on gas, electricity and water!), ever increasing "austerity" measures (public sector salaries cut by an average of 15%.. but, it should be noted, the politicians are NOT affected!) and $4 a gallon seems like a really sweet deal!

Just my €0.005 (can't afford any more!)

[wkb4447]

Yeah, well, I doubt that it is that simple. Or, at least it's different-simple. I don't buy that petroleum is at the mercy - or is the slave - of the free market. There are too many highly influential people with lots of money that move it around to fit their own selfish needs. Lowering prices is just one of the ways they can manipulate their profits. They win with prices going up and going down - depending how much they are "in" or "out" of the market, and what futures they are buying.

As Teddy Roosevelt said, "The trouble with capitalism is capitalists". Unfettered and unregulated, those capitalists have no shame, morals, or ethics to speak of. And if there are any "slaves" out there, THEY is US.

[reddit_]

I demand an investigation into falling gas prices! Falling gas prices are hurting the oil industry. Whether gas prices go up or down, it is bad news. As Mitch McConnell said "the single most important thing we want to achieve is for President Obama to be a one-term President."

[farmmike]

The author forgot to mention that she works for Exxon.

[Lungmucus]

That is rubbish....it's all rubbish. Where is Jerry Garcia when you need him?

[nohater]

grandfather remembers paying .24 a gallon for leaded gasoline when he was a young teen. can't even imagine that price a gallon. what happened?

[bigmanfrommaine]

Oil is in short supply, and will be from here on out. Whenever the economy has an uptick, oil prices will closely follow.

There isn't any was around this new reality, so you might as well get used to it!

[mryoubrian]

Another economists who does not understand how it works. No surprise.

High gas prices are one of the main factors that slow an economy down to a crawl. Like now. These are the same economists who have told us every year for the last 30 years that the "cost of living goes up 3 to 4 % per year". REALLY? 3 or 4 %?

In June 2008 gas was at $4.15, Nov. of 2008 it was $1.46 and now it is $3.75 here in Idaho, down .06 cents from its high. It has put a number of trucking companies out of business completely. No business can rely on steady fuel prices. Food items like ribs have gone from $6.58 (for a rack) to $14.78 in 2 years. Beef is officially too expensive for me here and imported shrimp is cheaper. Coffee is up 35% in the last 2 years.

Speculators always have an excuse for driving up the price of oil. War, possible war, unrest, hurricanes, storms,etc. Iran can't hardly sell its oil due to sanctions, Libya is only producing at 20%. Iraq is producing at 25%, Egypt is down, Algeria and Tunisia production is down, we have a war with Afghanistan, Civil war in Syria and guess what ... the price of oil plummeted 30%! The world is doing just fine producing oil without these counties running at 100%!

Another thing, there are different economies within economies. The world economy,regional, and national economies can be down and my local economy can be flourishing.

I work and live within a 50 mile radius... and that is my economy. Not much else matters.

[Dwain1938]

One thing that would go a long way to stabilize prices would be to get the Federal government out of the over regulation of oil in the USA.We have enough known reserves in the USA to make the USA self sufficient with out worrying about the mid east or Chavez!The reserves can be checked out on line.search for USA Oil and Natural gas reserves.Look at the jobs being created in South TX and North Dakota on land the feds can't control!

[Tokamak]

Your statistics are either stale or incorrect or personal delusion. Libya is now at pre-war levels. Iraq is nearly at its capacity. The other countries you mention are not down. If you're happy in your own little deluded cave, goodie for you. I am also happy for you. I prefer reality though. Makes life considerably more meaningful.

[jeannutson]

The drop in oil and gas prices resulting from lower demand and slow economic growth will ultimately have adverse impacts on the consumer as the overall economic situation worsens.