Gas Prices Drop, but Not Enough

The rapid rise in gasoline prices has stalled, although the plateau may only last a few weeks. The AAA Fuel Gauge report shows that the price of a gallon of regular, based on the national average, was $3.927 yesterday compared with $3.929 the day before and $3.925 a week earlier. The monthly trend shows off the recent spike. The price of regular gas was $3.778 a month ago.

Two schools of thought dominate the debate over gas prices. The first is that, because oil prices have dropped in the past month, gas prices will follow. This point of view is supported by the belief that the U.S. and its allies will release large amounts from their strategic oil reserves if crude prices stay high.

The second school believes the a drop in production by some large oil exporters, an unusually high number of shuttered refineries and unstable politics in some oil rich nations will allow oil prices to rise again. A support for this point of view is that summer travel will increase demand for fuel.

The trouble that gas prices cause, and will continue to cause, for the economy is present no matter which of the theories is true. Oil would have to plunge to take the cost of a gallon of regular back well below $3.50. Even at that price, lower middle class and lower class households cannot bear the erosion of income they suffer if they have members who have to drive much. A family with a $35,000 income, or $25,000, or one where the wage earner is unemployed, has no choice but to sharply curtail consumer spending to offset fuel costs. The effects of that on the economy may be modest because the consumer expenditures of these households always have been modest. However, the U.S. recovery is tentative enough that it needs every last measure of consumer spending.

Gasoline prices may drop, but not enough to make a difference in their effects on the U.S. economy for the next few months.

Douglas A. McIntyre