Drop in Gasoline Prices may be a Beneficial to US Economy

The Federal Reserve and Congress are unlikely to give any significant economic stimulus. However, gasoline stations might.

The average gasoline price has declined by around 10%, or 40 cents, since it reached the peak level of $4 per gallon in the early parts of April. With the expected gasoline consumption of 133 billion gallons this 2012, the reduction of 40 cents can add up to around $53 billion in yearly savings in case it continues for the entire year.

Deutsche Bank economist Brett Ryan said that because gasoline price are a defacto tax on consumers, a reduction can be equated to a tax cut.

The recent retail sales reported by the government estimates that the gasoline expense of Americans is lower by $1 billion in the month of May compared to the month of April. Moreover, that drop may possibly go on when the figures for the month of June are reported.

Lower gasoline prices were enough to cause a drop in retail salesĀ  paid by consumers from April to May, a first-time decline in almost two years.

To be certain, several of the gas price reductions are caused by the poor condition of the economy and the worries that it brings. The concern of traders over Europe’s recession because of its debt problems and China’s slowdown has pushed crude oil prices lower in the past months.

Economists are concerned that the economic circumstances can overwhelm the good side of lower fuel prices, since they lead to a drop on consumer spending.

However, there are important factors supporting gasoline and crude oil prices, such as higher production of domestic oil, stronger dollar versus the euro and several declines in political tensions in the Middle East, which have somewhat canceled out geopolitical risk to oil prices in the early parts of the year.

According to Chief investment strategist Jim Baird, although there are several negative factors pulling down oil prices, it is a plus to have businesses and consumers spending lower on fuel as this effect generally increases economic activity across-the-board.

Based on estimates, the gross domestic product of the country may increase less than 0.5% in case the 40 cent per gallon reduction in gasoline prices continues.

Although that is not sufficient to turn the weak growth to a strong one, it can lower the liklihood of recession for the U.S.

By: Chris Termeer

Chris Termeer

Chris Termeer is an oil and gas consultant, industry commentator and analyst. His book, Fundamentals of Investing in Oil and Gas provides a comprehensive overview of all aspects of the oil and gas industry, including exploration, drilling, production, storage, transportation and refining, to name but a few.

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