The Effect of Declining Gas Prices on the Economic Recovery

A few months ago, we discussed the possible negative effects of rising gas prices on the economy as oil and gas prices were rising rapidly in February. As many economists and experts were predicting a summer of reaching $5 per gallon of gas, there were significant concerns that consumers and households would be putting an increasing amount of money into their gas tanks instead of buying goods and services. Now that Memorial Day weekend and the unofficial start of summer are behind us, the numbers paint quite a different picture.

Oil dipped below $87 dollars per barrel on Thursday, and prices have fallen over 17% just in May. Gas prices have declined as well, but at a much slower rate than that of oil. Talk of $5 per gallon gas has subsided and we seem to be headed for a summer of less expensive gas.

What are the reasons for the decline? Tensions with Iran have eased, and U.S. consumption of gas has declined, while domestic production has increased. As alternative energy sources like natural gas and ways to utilize them become more developed, these sources have begun to offset some of our dependence on foreign oil.

This is very good news for the economy. Consumers not only have money to spend instead of putting it in their gas tanks, but they also may be more inclined to do even a modest amount of travelling this year. $5 per gallon gas would likely have limited many travel plans as well as discretionary spending, so this should help support our economy. If oil prices continue to fall, the benefits will be increasingly significant. An economic strategist recently theorized that every $20 per barrel decline in the price of gas could equate to a 1% increase in GDP, strengthening the economy and hopefully keeping some stability in the U.S. in light of the instability in the Euro zone.

The recent decline of oil certainly isn’t a sure bet to continue over the entire summer, as an issue in the Middle East or hurricane season could certainly trigger a spike in the price, but for now, let’s all enjoy our declining gas prices.

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