Gasoline Prices Plunge at Last

Finally, after a run-up in gasoline prices, they have begun to fall rapidly. The trend may help offset consumer concerns about their financial troubles as the fiscal cliff approaches. The impact of the event could rob them of some of their after-tax income. On the other hand, gas prices are volatile enough that the drop may not run through the end of the year.

According to the AAA National Office, as of yesterday, "week-over-week gas price decline is the largest in nearly four years." The national average for a gallon of regular has fallen for 11 straight days, which is the longest consecutive decline since the beginning of July. Yesterday's average reached $3.665.

The association made a projection that may well not be true because oil prices and refinery activity often change quickly:

AAA expects the national average price of gas to be between $3.40-3.50 by Election Day and between $3.25-3.40 by Thanksgiving. Wholesale (RBOB) gasoline futures have dropped nearly 30 cents since the start of October and retail prices are now beginning to reflect this drop.

There is no single tipping point at which economists can claim that gas prices have fallen far enough to alleviate pressure on consumer spending. The effects, of course, vary from household to household, depending primarily on what income people have left after their expenditures on the necessities of their homes, food and often education. Among the most critical factors is how far people have to drive to their jobs and how often. The final major determinant is the cars themselves. Fuel efficiency can range from less than 20 mpg for heavy cars, pickups and vehicles that use premium to more than 40 mpg for light, four-cylinder engines and hybrids.

The gas price relief could be essential to the economy as the critical shopping season approaches. Retail activity will be a key to expansion or contraction of gross domestic product in the fourth quarter. But it remains to be seen whether consumers will cut their economic activity no matter what due to the fear of higher taxes next year, which could cancel out the effects of lower gas prices.

The average cost $3.25 for a gallon of regular may not matter at all.

Douglas A. McIntyre