Lower Gas Prices

Lower Gas Prices! Yes! Ok many of us have noticed that gas prices have come down significantly over the last weeks; or at least some of us have noticed that it is costing us between $5 and $15 LESS than usual – depending on whether your car likes to sip gas or knockout a gallon or two every street light.

So What Do I Get? My question is, do you think that it will make much of a difference? Will it let you keep more of that spending money in your wallet? Well, it depends on how you look at it. Off the bat any reasonably intelligent person can surmise that lower gas prices will leave more money in their pocket – this is true.

BUT, we are all still paying more for goods and services today than we were, say, last year because of higher oil prices. The reason for this is that many businesses have already increased prices. I’m not saying that EVERY business has, but many have. So if you factor in the higher costs for things like movie tickets, groceries, and other goods and services, then the drop in gas prices is a drop in the bucket relative to the total amount more we are paying.

Of course, companies that have more elastic prices – that is the amount of their goods and services demanded is VERY sensitive to changes in price – will react much faster to lower gas prices than the price of a movie ticket. I don’t have the data but I would probably expect that most goods and services that are considered a necessity would have a more inelastic price.

Fine Print There is one more caution that should be noted. Studies have found a pretty strong relationship between the demand for oil and economic growth. The problem with that relationship is that it is positive. Thus, lower overall demand for oil can be an indication of lower economic growth.

Why am I throwing this caution out there? Well, because oil prices have to come down for a reason, and consequently, the recent price reductions at the pump are reflecting lowering demand for oil. One reason can be that the summer season has come to and end. Another could be that people are driving less or perhaps dumping their gas guzzlers for gas sippers. Who knows, but the fact is that a relationship has been established. It is something worth noting.

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