Valdosta Daily Times

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April 23, 2013

Drop in gas prices benefits U.S. drivers, economy

NEW YORK — A sharp decline in the price of oil this month is making gasoline cheaper at a time of year when it typically gets more expensive. It’s a relief to motorists and business owners and a positive development for the economy.

Over the past three weeks, the price of oil has fallen by 9 percent to $89 a barrel. That has helped extend a slide in gasoline prices that began in late February. Nationwide, average retail prices have fallen by 27 cents per gallon, or 7 percent, since Feb. 27, to $3.52 per gallon. Analysts say pump prices could fall another 20 cents over the next two months.

The price of oil is being driven lower by rising global supplies and lower-than-expected demand in the world’s two largest economies, the United States and China. As oil and gasoline become more affordable, the economy benefits because goods become less expensive to transport and motorists have more money to spend on other things. Over the course of a year, a decline of 10 cents per gallon translates to $13 billion in savings at the pump.

Diesel and jet fuel have also gotten cheaper in recent weeks, which is good news for truckers, airlines and other energy-intensive businesses.

“It makes a big difference to my bottom line,” says Mike Mitternight, owner of a heating and air conditioning service company in Metairie, La. He has five pickup trucks that can burn $1,000 of gas per week when prices are near $4 a gallon. Lately he’s been paying as little as $3.19, and saving $200 a week.

Gasoline prices typically rise in the late winter and spring as refiners shut down parts of their plants to perform maintenance and begin making more costly blends of gasoline required by federal clean-air regulations. The trend was earlier and less dramatic this year. Pump prices only came within 15 cents of last year’s peak.

Oil production is growing quickly in the U.S. and Canada, helping boost global supplies. And some of the factors that pushed prices higher the two previous years — political turmoil in North Africa and the Middle East and refinery disruptions in the U.S. — haven’t materialized this spring.

At the same time, demand for fuels is growing slower than expected. China, the world’s biggest oil importer, is experiencing slower-than-expected economic growth. And much of Europe is in recession.

In the U.S., wintry weather in the Midwest and Northeast has kept more drivers off the roads this spring, analysts say.

The typical U.S. household will spend an estimated $326 on gasoline this April, the equivalent of 7.8 percent of median household income, according to Fred Rozell, an analyst at GasBuddy.com. That’s $38 less than last April, when households spent 8.8 percent of their income on gas.

“It’s the difference between going out to dinner one more time or not,” says Diane Swonk, chief economist at Mesirow Financial. “It matters.”

The U.S. government releases its initial estimate of economic output during the first three months of 2013 on Friday. Economists forecast the economy grew at an annual rate of 3.1 percent, compared with 0.4 percent in the final three months of 2012.

Philip Verleger, an economist who studies energy prices, says that many monthly household expenses are fixed, but gasoline is one of the few big expenses that varies. That means when gasoline prices rise — or fall — people notice.

“This is the equivalent of a pay raise,” he says.

Shippers and airlines are also benefiting. Fuel is by far airlines’ biggest and most volatile cost. A one-cent decline in the price of jet fuel saves the U.S. airline industry $180 million over a year, according to the industry group Airlines for America. Lower energy prices also give potential customers more money to spend on air travel.

Airlines aren’t ready to celebrate yet because the relief could prove to be short-lived, says John Heimlich, chief economist at Airlines for America. “It looks promising but we’re not counting our chickens,” he said.

Political turmoil or refinery problems could crop up at any time. Analysts are particularly worried about the transition of power in Venezuela, a major oil exporter, after the death of President Hugo Chavez. Violence has erupted in the wake of a closely contested election, and the financial situation of the country is precarious. Analysts worry that the country’s oil production could slip.

Also, refinery maintenance in the Midwest is already affecting prices there. Drivers in Ohio, Michigan and Indiana are paying only slightly less than they did last year at this time, and prices there have been creeping up over the last couple of weeks.

Gasoline prices reached a high this year of $3.79 per gallon on Feb. 27. Last year’s peak was $3.94, and it came on April 6; last year’s low was $3.22 on Dec. 20. The average price for all of 2012 was $3.63 per gallon. The Energy Department forecasts the 2013 average will be $3.56.

Analysts say there are limits to how far oil and gasoline prices will fall. Countries in the developing world are still growing fast and pushing world oil demand higher, perhaps to a record this year. And if oil prices fall too far drillers will be forced to cut production to try to stem the decline.

That means Mike Mitternight, the small business owner in Louisiana, won’t likely get his wish: He’d like to see gasoline prices between $2 and $3 per gallon.

“I still think it’s high and we could bring it lower,” he says.

Jonathan Fahey can be reached at http://twitter.com/JonathanFahey.

 

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