Dip in gas prices may lift entire economy

Gasoline prices fell by more than 30 cents a gallon last month, and everyone stands to benefit.

Motorists are finally getting a break at the pump.

Over the past month, gasoline prices have dropped more than 30 cents a gallon with the price of fuel at the lowest level since mid-April.

The falling prices are a welcome benefit to consumers who have been grumbling all year about how much more it costs to fill their tanks. With more money in motorists' pockets, the economy should benefit as well since this is the time of year when consumers tend to spend more time at the mall. In fact, the ripple effect of falling energy prices should help everyone from Detroit automakers to the airline industry to incumbents running for office this fall.

"The decline in gasoline prices has the effect of a tax cut," says Richard DeKaser, chief economist at National City Corporation, a bank in Cleveland. "Of course it's only partly reversing the 'tax increases' of the past three years."

The swing in gasoline prices has been rapid. Gasoline peaked at about $3.04 a gallon on Aug. 4. Now the national average is closer to $2.73 a gallon, according to GasolinePriceWatch.com. "In Dayton, Ohio, I'm paying $2.29 a gallon," says Brad Proctor, who runs the website.

Although gasoline purchases account for only 3 percent of consumer spending, Mr. DeKaser estimates the lower pump prices will add $2 billion a month in buying power to the economy that " will go toward savings or into the pockets of retailers that would have otherwise been heading to Venezuela or the Middle East," he says.

Falling gasoline prices, which will help ease some inflationary concerns, are also part of a favorable economic mosaic that is developing this fall. The Department of Labor reported Friday that the nation's unemployment rate in August dropped to 4.7 percent, down from 4.8 percent in July. Even more important, the economy created 128,000 jobs, a number consistent with moderate economic growth.

Lukewarm economic growth fits with the plans of the Federal Reserve, which opted not to raise interest rates in August. Based on the current economic data, Ann Owen, a former Fed economist, says she thinks the Fed could go for either another one quarter of a percentage point increase or continue its pause when it meets on Sept. 20.

"I don't think the Fed knows for sure what it will do," says Ms. Owen, who teaches economics at Hamilton College in Clinton, N.Y.

Besides the employment data, the Fed also monitors consumer expectations for inflation. Last Friday, the University of Michigan released its Survey of Consumers, which on a broad basis showed a modest decline in consumer confidence in August. However, on the inflation front, it found consumers anticipate an inflation rate of 3.8 percent in the year ahead.

"The survey found people are more concerned about persistently high prices versus further increases in interest rates," says Richard Curtin, the Survey's director.

But if it weren't for falling gasoline prices, says Mr. Curtin, consumer confidence would have been even lower.

The main reason for the lower prices is a drop in the price of a barrel of crude oil from the $75 range to just above $69 on Friday. One reason for that decline is a shift in oil market speculation, says John Felmy, chief economist at American Petroleum Institute in Washington. "The worst-case scenarios did not occur," he says.

For example, initially BP announced it would turn off the spigot on 400,000 barrels of oil per day on Alaska's North Slope to repair corroded pipes. However, the company later reduced the curtailment to 200,000 barrels per day and indicated it may get the entire production back on line sooner.

"If the corrosion is not as bad as feared, BP could potentially bring the oil back on stream sooner than the original estimate," says Rick Mueller, a senior oil analyst at Energy Security Analysis Inc. in Wakefield, Mass.

At the same time, refiners are beginning to produce the winter blend of gasoline. As a result of the shift, Mr. Felmy says, some companies may be lowering prices to reduce their summer gasoline inventory.

The price of ethanol, which is used as a blending agent, has also seen a significant drop in price. Since mid-July, the price of ethanol has dropped about 72 cents a gallon. "Every barber in Ameri- ca invested in an ethanol plant," he says in explaining why the price has dropped so quickly.

Geopolitical uncertainties still have the potential to push prices back up. Iran, for example, maintains it will continue its uranium enrichment program. However, it's not clear if the United Nations will actually enact sanctions.

"If the Iran issue is resolved, the fundamentals are pretty bearish for the price of crude oil," says Mr. Mueller. "There is plenty of inventory here and in Europe, there is new production coming on stream, and it's nearly the end of the driving season."