Are Low Gasoline Prices Actually a Bad Sign for the Economy?

publication date: Nov 20, 2014

It’s a well known fact that many folks in the news media hype negative stories and trumpet things that they’d like us to be spending more time worrying about. So, if you’ve been enjoying the much lower gasoline prices of late, wipe that smile off your face! Apparently, you haven’t read the recent Washington Post column entitled, “Why $3 a gallon gas is a bad sign for the global economy.”

Below are the highlights of that column followed by my comments:

 

There are already signs that gasoline prices, which have fallen to their lowest level in the past six years, are making it easier for Americans to get by. The sudden, 20 percent decline in gas prices has saved the average person $520 since June, and people are putting that extra money to use. Wal-Mart said last week that its quarterly sales had increased for the first time in nearly two years, and other retailers are seeing better business, too.

…falling gas prices aren't exactly cause for celebration. It is true that they're partly a result of fracking, which has made fuel more readily available in the United States, and the response of Saudi Arabia and the other oil-exporting states, who are nervous enough about American drilling that they're not jacking up prices, as they might have done in the past. These are good things (serious environmental worries aside), and they've created a worldwide glut of oil.

What's worrisome is that no one is buying all that oil.

The unfortunate truth is that low prices for gasoline are a symptom of a sickly global economy. It isn't just gas prices that are falling as consumers make do with less and businesses put off new investments in Europe, China and Japan. Metals such as copper, silver and platinum are cheap, too, and so are crops like corn, soybeans and wheat.

If prices continue to fall, the economy could be in real danger, because there won't be much central banks can do to encourage spending with interest rates already at or near zero in most of the world. Lower prices might be good in themselves, but it's what they reveal about the way things are headed that's cause for concern.

 

My Comments

The fact that oil prices and gasoline prices have fallen recently is hardly a bad sign. This newspaper writer doesn’t understand basic economics. When oil prices rise to high levels, consumers and businesses find ways to make do with less and seek out alternatives like low priced natural gas. For example, natural gas production has zoomed higher in recent years and the U.S. is now the leading producer of natural gas.

Global oil production is up thanks to many new production venues including in the U.S. and the shale oil extraction techniques being used. It is interesting to note that the Washington Post “journalist” reveals his view on the environmental impact of this when he writes about it, “…serious environmental worries aside.” This parallels the current administration’s view that low oil and gas prices are a “bad thing” since it is believed to encourage more use.

The bottom line is this. As with just about everything else, when it comes to energy, there are alternatives and competition. For many years, OPEC tried to artificially inflate the price of oil by restricting production. This undermined their position longer-term because high oil prices caused more motivation to develop alternatives and for more countries and companies to conduct oil exploration.

Also, the writer said, “What’s worrisome is that no one is buying all that oil.” No need to worry about that. Plenty of people and companies are buying oil and gasoline. While the global economy isn’t growing fast, it is growing at a steady, moderate pace. That’s why U.S. corporate profits and stock prices have hit new all-time highs recently.


 

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Copyright Eric Tyson, 2008 - 2019 all rights reserved.

Eric Tyson is the only best-selling personal finance author who has an extensive background as an hourly-based financial advisor and who does not accept speaking fees, endorsement deals or fees of any type from companies in the financial services industry or product or service providers recommended in his articles, books and his publications.