Thursday, October 30, 2014

Gas, gas everywhere but is it really "cheap"?

A couple of thoughts on "plunging" gas prices and what it really means to consumers and the US economy.

1) So we have to use some generalizations when talking about the issues like national averages, but it is widely reported that the "average 35-54 American" drives about 14,000 miles per year which works out to about 270 miles/week.

The average miles per gallons achieved by new cars in the US is around 25 mpg, but we know there are many older cars out there as well so let's assume 22 mpg is a national average.  Thus, the average American would use about 12 gallons of gas/week.

Now if we look at the change in the retail cost of gasoline over the past six months we see that it has fallen sharply - almost $0.70/gallon.  Take $0.70/gallon x 12 gallons per week and you are saving almost $8.40 per week!  Over the course of a month you could save enough to take your family to the fast food restaurant of your choice!

6 month chart 

source: gasbuddy.com

2) Then we have to look at the recent decline as it compares to the longer trend.  Here is the 11 yr price chart (with Syracuse prices in Red).

source: gasbuddy.com

On this chart the recent "plunge" in gas prices doesn't really show up does it?  You can also see that since 2005 and hurricane Katrina caused a spike in prices to $3.00/gallon, gas has pretty much been in the $2.50-$3.50 range for most of the country.

3) Finally, here's the thing that is catching some people off guard - yes, lower gas prices puts a few more dollar bills in your pocket but remember all of the joyful proclamations about all of that oil the US produces?  Well, lower crude prices means weaker corporate results for many large oil and gas companies.  Also, a prolonged period of weakness could really impact some regions that have been booming (like Houston) and just today we saw Goldman start to pull back growth expectations for the US because of lower oil prices.

The drag on major oil and gas companies is now so substantial and they've become such an enormous part of the US economy that it now outweighs the possible benefits that consumers may see from lower prices.

Cheers!


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