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Gas prices reach early peak but may fall soon

Relief at the pump may juice the whole economy.

By Money Staff May 27, 2014 11:51AM

This post comes from Irwin Kellner at partner site MarketWatch.

MarketWatch on MSN MoneyThe U.S. economy may soon receive some much-needed stimulus in the form of an unexpected drop in prices of gasoline.

Gas pump © Thinkstock, JupiterimagesAs sure as Memorial Day heralds the return of the peak driving season, that’s how quickly gasoline prices follow. As a matter of fact, the conventional wisdom has it that gasoline prices usually go up together with both temperatures and consumer demand.

This rise usually begins to taper off come Labor Day. That’s when vacationers return to work and resume their normal driving patterns.

But the current year appears to be shaping up somewhat differently.  According to the Energy Information Administration, prices at the pump are going to fall from today’s levels. This forecast is based on crude-oil production (which is up) and global demand (which is down).

Rising oil production has boosted U.S. crude-oil inventories to some 398 million barrels. That’s the highest level since way back in 1931. On the other hand, demand is declining, both secularly and cyclically.

Near-term, the difficulty people have in finding jobs means less driving. And because many jobs are low-paying, those who are employed turn to mass transit, which is cheaper than driving a motor vehicle.

Longer-term, demographics have depressed demand. The millennials and other young people hardly drive at all, while on the other end of the age spectrum, as people get older and retire, they tend to drive less.

Also cutting into demand is technology prompted by government mandates regarding fuel economy for cars and trucks.

Not only do today’s gasoline engines sip far less fuel than their older counterparts, but many also come with a setting that defaults to the economy mode when started. This means the vehicle starts moving in a higher gear, and when it stops moving, the engine shuts down. And of course, let us not forget hybrids, which combine gasoline with some form of electric propulsion.

Besides falling counter-seasonally, gasoline prices are down compared to this time last year. Indeed, in many areas gas prices are the lowest they’ve been since 2011. This reflects demand that has been declining since reaching a peak in 2007.

If this trend continues (meaning that refinery production isn’t cut because of war or a hurricane), it bodes well for the fledgling recovery. A drop in prices of such a necessity as gasoline is like a tax cut. Each penny decline in gasoline puts $1 billion back into people’s pockets — money that almost certainly will be spent.

This could break the logjam that’s been holding back economic growth.

Up until now, employers have been reluctant to hire until demand improves. For their part, consumers have been hesitating to spend until they are sure that job prospects are getting better.

These petrodollars should give business the confidence it needs to step up hiring, which, in turn, will encourage consumers to boost their outlays even more.

In other words, thanks to falling gas prices, the U.S. economy will go from a vicious cycle to a virtuous cycle.

More from MarketWatch

May 27, 2014 2:53PM
Until gas falls to around $2.00 a gallon (which was a little over 6 years ago) this economy will never recover to where it was.  10 to 20 cents a gallon does not mean much in consumers pockets (maybe $3.00 in the consumers pocket on a 20 gallon fill up), however, $1.50 less to around $2.00 a gallon means $30 extra dollars per fill up...this will definitely jump start buying, etc. as people will see they have some extra money to spend on food, clothes, entertainment, etc.  It would be nice if there was a way to lock into $2.00 a gallon for at least 6 months & see the  outcome.                             
May 27, 2014 2:24PM
I've been hearing these wall street analysts saying this for years now and guess what, they are all pretty much full of crap.
May 27, 2014 2:19PM
Might as well shove that pump nozzle up your **** and enjoy the screwing the oil conglomerate gives you. It's been a downhill slides since about 2005 with things getting more expensive and it's never going to change. The powers that be won't stop until they pry the last penny out of your cold, dead hand.
May 27, 2014 3:15PM
Gas is 3.75 a gal..goes down 20 people thinking good deal..gas goes up to 3.95 a gal and goes down 10 cents..people thinking hell a va companys are trying to use psychology on people and it just doesnt fly with me..
May 27, 2014 2:10PM

If the supply starts to outpace demand speculators will buy up the surplus to maintain the profits from already purchased barrels of oil.  Then they will sit on those holdings till the price goes up to a point and sell them off for more.  Gas demand will always rise over an extended period of time so eventually all the oil the speculators have amassed will be worth a mint. 


Prices will never fall in the long run it's always a short term low than a higher peak than the last one was.  The way the fuel market is going it feels like the companies are trying to check the level of sensitivity to price changes and make people numb to price changes in fuel.

May 27, 2014 2:06PM
I don`t see the price at the pump falling too much. If we are lucky, around November the price will fall 25 cents per gallon or so. If we are lucky that is. Then after the elections the price will go back up.
May 27, 2014 2:20PM
Supply and demand are no longer at work..  True S and D occurs when a product is in short supply, not when someone or investment group/bank tells you it is.
May 27, 2014 2:54PM
I'm not buying this load for a minute. It seems like every time they run some article about gas prices going down, they are really only a day or so from going up 5 to 10 cents. Some refinery will go offline, or a pipe line will stop flowing and we will pay. Last fall they ran an article that the cheaper winter blend was in full production. Our pump price was $309.9. They said it would drop below $3 and stay down for some time. A week later, it went up a nickle, and kept on doing so every few days until we were at $3.68.9. It stayed there for months. Now the price has lowered to $3.58.9, although I just saw one of the stations near my house at $3.69.9. If it looks like prices might come down, the industry will find a way to prop it back up. Although I do agree with the author that fuel prices are killing the economy.  
May 27, 2014 3:29PM
This is all such a joke...The gas/oil companies got us all used to $2, then $3, now $4 and then when it drops a few cents we feel like such optimists! Until the President and Congress act to stop giving so much aid/tax breaks away from the huge oil companies while they continue to gouge us amid their soaring profits, nothing will change...but that's not going to happen!
May 27, 2014 2:12PM
Not gonna happen. This article brought to you by ICE, manipulator of gas and oil pricing.
May 27, 2014 3:14PM
I remember when it was $1.15 and was told it will go up to $1.25 for a short time when the hurricanes came thru and messed up the refinery.

 I have never seen it go down yet......

 Must be nice to be able to lie and make billions maybe the reason I'm not.  Maybe I should try this method seems to work for everyone......

May 27, 2014 1:39PM
Hard to buy global demand falling when the EIA also reports that China's gasoline demand is increasing at an alarmingly quick pace...
May 27, 2014 3:06PM
Why would gas companies even consider lowering profit?  No, the bar is set and only goes up.
May 27, 2014 3:28PM
If you were around, all this planned "speculation" began around 1999 when Clinton and his Wall street monkeys "deregulated" the oil markets (about the same time they deregulated the banks, and after they did "free trade") and I believe this oil market deregulation allowed "investors" to buy oil without ever having to take delivery. The price quickly went from about $1.50 to $4 and I'm sure his buddies made a lot of money from the new ability to rig the market. I say re-regulate and put the genie back in the bottle. We were all better off before Clinton and those after him ruined the USA (I actually voted for that bum. should have voted for Perot). And remember, the oil companies employ large teams of psychologists who continually research how to best buffalo and fleece the people (and don't forget about their teams of lobbyists who buy off "our" representatives). They've succeded in getting us to believe that $3 is a great bargain!
May 27, 2014 2:34PM
Ukranine.  Simple price upper with little or no reason.
May 27, 2014 3:52PM
I get tired of our fuel being so expensive.  They forgot to mention that demand is so low because no one can afford to go anywhere due to the gas prices.  More people are staying home or close to home, because by the time you pay for your gas to get to where you're going, you've already invested a small fortune.  We have a boat and to fill it all the way up will cost $300, how can the working person enjoy anything after paying that just for fuel?????  It's a shame that our government is making the American people suffer the consequences, while they enjoy their high dollar jobs and expensive vacations.  This makes me disgusted, as I'm sure many many Americans feel the same way...who knows maybe I'm wrong!
May 27, 2014 2:34PM
It's about time that we the consumer really start fighting these crude oil refiners any way we can.  We still drive way to often and keep our foot on the gas pedal way too hard.  Combine your errands, commute to work by bus or rail, keep your vehicle well maintained, and either drive a smaller vehicle or burn diesel which gets better mileage than gasoline. 
May 27, 2014 5:51PM

"Every penny drop is like a Billion Dollar Tax Cut"  Really? 

Translating:  In my case a 10-cent drop or $1.70 per tank full.  That's a $5. savings monthly.

That'll get this Ole' Economy in a rebound mode, Quite Quick.

MSN  Please.

I bet the real reason we may see a small gasoline summer drop, is because

some politicians would like to get re-elected this November. 

May 27, 2014 3:17PM
Suckers think it is not the oil companies gouging you?   I remember tobacco companies saying in Congress...No it's not addictive, nicotine, remember?  Suckers.  Lap dogs for the rich
May 27, 2014 2:38PM
well then i think regulation like we had in the 70 would help us more than anything
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