Sunday, January 31, 2016

Economy: Falling Gas Prices, Rising Consumer Spending?

(Drivebycuriosity) - Oil prices have been on a tear recently (Brent Crude jumped about 30% since January 20 bloomberg), but gasoline prices at the pump are still falling. Today the average US gas price dropped below about $1.80 ($1.799) -  gas costs now 10% less than last month (fuelgaugereport).

The recent gasoline price drop is remarkable. Normally gas prices follow a seasonal cycle and start to climb in January because many refineries are using the weak winterly demand from January through March to shut down for their yearly maintenance. So, "in a typical year, prices at the pump are flat to modestly higher at this point", explains the research service Bespoke (bespoke).

Gasoline prices are still falling because gasoline is still expensive in comparison to crude oil, the unrefined commodity. WTI (US type oil) & Brent Crude (international type) are around 70% cheaper than midst 2014, but gas prices dropped "just" 50%. The gap between crude prices and distillate prices is still pulling on the gas price.

It is very likely that the seasonal cycle will kick in in the coming days and will lift gas prices again. In the recent years gas prices had risen seasonally 20% to 30% through the peak of the summer season.  If this pattern would repeat the gas price might climb to around $2,30, still cheaper than last year´s peak prices (around $2,70).

I think that crude oil - and so gasoline - will stay cheap in the foreseeable future, even with some occasional speculative price spikes. The global oil glut won`t go away, because the US frackers, the cause of the oil flood, will continue pumping, thanks to efficiency gains and falling costs. And the Iran is adding to the oil flood, since the sanctions have been lifted.

The recent drop (about 20% since begin of November) is a gift to the consumers. They have more money to spend for other goods & service, which should foster the whole global economy. The positive impulse wasn`t visible in the last year, because the price drop of crude oil needs time to work through the system (I explained that here driveby).

I think that the recent gas price drop could be the trigger to rekindle consumer spending and rekindle the global economy this year. The year 1986 had a similar oil price collapse that started a decade of cheap oil and economic prosperity which lasted till the year 2,000 (will-history-repeat-itself). Cheers to cheaper gasoline.

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