Home > Main > Fall in Gasoline prices could spark a Boom

Fall in Gasoline prices could spark a Boom

October 3, 2011

Gasoline prices are linked more to Brent Crude than to RBOB over the last year or so.  There are complex reasons for this, but lots of it is due to not enough infrastructure here in the United States to move oil and gasoline across the country.

Brent is down about 25% right now from it’s highs, but Gasoline is only down about 12%.  If we look at a 20 day moving average – which is about 1 month of trading days  – we can see Brent has only fallen about 12% too.

Still, with the QE II trade going away entirely, we can expect the price of gasoline to fall further.  This could spark a boom.

The payroll tax cut stimulus was soaked up entirely by the increase in gasoline prices.  Now that gasoline is falling, this tax cut is beginning to be felt by the consumer.  If gasoline prices fall to 2.70 a gallon across the country – and they could fall much lower – then we could see over 1% added to GDP.

Usually, it’s about 1.4bn added to consumer spending for every $.01 drop in gasoline prices.  Prices peaked at around 3.96 nationwide, and they could fall to $2.75.     This means we could add as much as 121 * 1.4 = $169bn in stimulus when gas prices fall.

This spending is most likely subject to a multiplier of probably 1.3, so we’re going to see something like $220bn in spending, or 1.5% of GDP

We’re growing at about 1.3% for the last quarter.  1.3 + 1.5 = 2.8%

That’s not bad growth.  2.8% is near the rate necessary to make a good impact on unemployment.

 

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  1. October 3, 2011 at 4:38 pm

    Gasoline prices seemed to have peaked about the same time as the stock market — in spring 2011. So will the bottoming also be coincident, perhaps in early spring 2012?

    In summer 2008 gas prices started to fall, going from over $4/gallon to under $2/gallon in the 2nd half of the year. Gasoline prices started back up around the beginning of 2009, before the stock market bottom around March 2009..

  2. beowulf
    October 4, 2011 at 1:30 am

    “In summer 2008 gas prices started to fall, going from over $4/gallon to under $2/gallon in the 2nd half of the year. Gasoline prices started back up around the beginning of 2009”
    Randy Wray explains why that happened:

    “There was an investigation in Congress. I wrote my paper, and a guy named Mike Masters was testifying in Congress. He was a commodities market expert, saying, “It’s simply not true. It’s not supply and demand. It is the flow from pension funds and others into futures contracts that is driving the price up.”

    “The funny thing is that right after the release of these reports and the testimonies in Congress, what happened to the price of oil? It fell by 2/3–below $50 a barrel, immediately. If you look at the financial flows, again, the correlation is perfect. Pension funds pulled 1/3 of their money out of commodities because they were afraid that Lieberman and Stupak were going to push through laws in Congress that were going to limit pension funds’ abilities to buy commodities. They were also worried about the public relations fallout if their own members of these pension funds found out that it was pension funds that were driving up the price of gasoline at the pump. So they pulled the money out.

    “Of course, then we had many other problems in our economy to worry about, Congress went on to other things, no laws were passed to limit speculation in commodities, real-estate markets went bust. There was no place for pension funds to put their money–other than commodities and the stock market–so they started flowing back into there and the prices started going up again.”
    http://pragcap.com/randall-wray-on-the-commodity-bubble

  3. October 15, 2011 at 6:06 pm

    As I was filling up the C70 last weekend, I noticed the $3.33/gallon price, and thought to myself “Yeah, we’ve been conditioned to think that $3.33 is cheap”.

    I recall when in High School, the price of unleaded went over $1 a gallon, and how horrified I was. Would I be able to drive to the beach on $5 of gas? Oh no!

  4. October 16, 2011 at 12:19 pm

    The Iran assassination plot against the Saudi diplomat that was reported this week is interesting.

    At least part of what has been going on in oil the last 10 years is renewed discipline within OPEC (which admittedly gets easier as prices rise). And at least part of that arose from the Saudis (the lowest cost producer) throwing in the towel in their efforts to destabilize the theocracy in Iran through low oil prices. The Iranian plot makes me wonder if tensions between the two will increase which might prompt SA to turn on the spigot again, encouraging cheating among the other members of the cartel.

    There is still a floor though. The market for oil is a very different beast than in the 90’s due to increased demand from emerging economies. A growing portion of the market is now being supplied by high cost producers (tar sands, deep water wells, etc.) and I doubt OPEC has the capacity to meet demand at sub $50 levels based on current conditions.

    Plus, I can’t make heads or tails of this Iranian deal. The whole thing seems utterly ridiculous to me and I can’t imagine what the motivation of the Iranians would be in killing a Saudi diplomat on US soil. Where does that get them?

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