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:
- Crude oil: 66 cents
- Refining costs and profits: 13 cents
- Taxes: 11 cents
- Distribution, marketing and retail costs and profits: 10 cents
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.
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