Gas prices poised to drop below $3 a gallon, as Fourth of July holiday nears

South Carolina is the first state to see its gas prices drop below $3 a gallon – the first time a state price has been that low since January.

AAA, the national motorists’ organization, forecasts that within the next week, the Palmetto State, whose average gasoline price is now $2.98 a gallon, might be joined by Mississippi (currently at $3.05 a gallon), Alabama ($3.06), and Tennessee ($3.06) – just in time for the Independence Day holiday. Prices in those states are dropping by about a penny a gallon per day.

It’s not out of the question that yet other states might crack the $3-a-gallon level by Labor Day.

Nationally, the price has a little further to fall to get below the $3 level. The national price of regular gasoline on Wednesday was $3.38 a gallon, which was 26 cents a gallon lower than a month ago and 18 cents a gallon lower than a year ago, according to AAA.

And the price decline is accelerating, says Michael Green, a spokesman for AAA. “This is great news as we move into the middle of the summer driving season,” he says.

The falling price of gas is a key reason that AAA predicts a decade-high number of travelers – some 42.3 million – on the road for the Fourth of July holiday. This would be up 4.9 percent from last year.

“Declining gasoline prices are motivating a lot of people to get on the road. And because the holiday is on a Wednesday, a lot of people are planning to take off the entire week,” Mr. Green says.

Gas prices are an important factor in how consumers feel about the economy. Many people know how much they paid for their last tank of gasoline. In addition, they see the price advertised at gas stations every day.

Tumbling gasoline prices is one reason that consumer confidence has held up, says chief economist Dennis Jacobe of Gallup, the polling organization.

On Tuesday, the Conference Board, a business research group, reported that its Consumer Confidence Index had fallen modestly for the fourth month in a row.

“Confidence would be a lot lower if not for falling gasoline prices and the benefits they are providing,” says Mr. Jacobe.

If gas prices continue to fall, he says, it should help President Obama and other incumbents. “Obama gets hurt when they are going up,” he says. “But he gets the most pickup with an improving economy.”

In theory, the decline in gasoline prices should become a significant economic tail wind this summer, says Mark Zandi, chief economist at Moody’s Analytics, in an e-mail.

A decline in the price of oil, if sustained, will save households about $35 billion over the coming year, Mr. Zandi estimates. That would be equal to one-third of the payroll tax cut enacted this February.

“And I would expect prices to fall further in coming weeks,” he writes.

However, Zandi says, consumers have not yet decided whether to spend their extra cash because they are worried about their jobs and are wondering what the falling stock market might portend. In May, the Dow Jones Industrial Average was off by about 6 percent. It has since had a modest rebound of 1.5 percent.

At the same time, corporations are wary about making new hires until they determine how the European debt crisis and the slowing Chinese economy are affecting their sales.

The global economic slowdown is reflected in the price of oil, which has fallen 27 percent since May 1. A portion of the oil price decline is related to the increasing value of the US dollar as investors flee the euro and invest in US Treasury bills, says Paul Kavanaugh, a senior wealth manager at PFG Best in Cedar Falls, Iowa.

“This is all related to the turmoil in Europe,” Mr. Kavanaugh says. “The market hates uncertainty, and there is a lot of uncertainty around.”

Oil traders have even ignored the upcoming deadline for Iran to open up its nuclear facilities or face the possibility of total sanctions on its oil exports. According to an estimate by the US Energy Information Administration (EIA), Iran’s oil production is expected to drop by 850,000 barrels to 2.7 million barrels per day by the end of 2012 because of previous sanctions. The new sanctions could reduce Iran’s production further.

If sanctions against Iran do take place, they will come at a time when the demand for oil is falling. Recently, IHS Global Insight lowered its estimate for world GDP growth by 0.5 percent, which could translate into a reduced demand for oil of 400,000 barrels a day.

On the other hand, the supply of oil is rising. In the United States alone, crude oil production is up by 600,000 barrels of oil per day. “That growth is mainly from onshore production in oil fields using new technologies,” says Tancred Lidderdale, an energy analyst at the EIA.