Some relief as gas prices fall

Prices below $4 a gallon could help carmakers and back-to-school retailers.

When the price of gasoline crested over $4 a gallon, it threw a bucket of cold water on the economy: Americans scaled back their driving, parked the SUV, and even cut back their spending at the mall.

But last Friday, gasoline prices fell below $4 for the first time since June 5, and they continued to drop during the weekend. As of Sunday, the average price of gasoline was $3.94 a gallon, according to GasPriceWatch.com.

Will it help revive the economy?

So far the drop, though modest, has been noticeable. In California, for example, prices are off 18.7 cents in the past month, a 4 percent decline. That's probably not enough to send consumers streaming back to the mall immediately. But if Americans continue to see gasoline prices fall, it could be a psychological boost, some economists say. And if consumers perceive the price decrease as more than a short-term drop, it could help retailers as they gear up for back-to-school sales. It might even help the Detroit automobile companies.

"One of the first things the falling gasoline price does is potentially help consumer confidence," says Dennis Jacobe, chief economist at the Gallup Organization in Washington. "Even though prices are still high, if they are going in the right direction, that helps a little bit."

The economy may also benefit from some help on the housing front, which has been beset by soaring foreclosures. On Saturday, Congress passed a housing relief bill that could provide up to $300 billion to restructure mortgages and to shore up Fannie Mae and Freddie Mac, bulwarks in the mortgage business. The housing legislation, which President Bush has indicated he will sign, could help provide some relief for home­owners who qualify for restructured government-guaranteed loans. And it might assuage some concerns on Wall Street, which has been worried about Fannie and Freddie.

As for the energy front, the price of gasoline is now down 18 cents a gallon, on a national basis, from its peak of $4.12 a gallon set on July 16. In some markets, the fall has been far greater. In Dayton, Ohio, where GasPriceWatch.com is located, the price has fallen almost 27 cents a gallon in the past month.

If the price of gasoline were to continue to fall, it would help beleaguered consumers. On Friday, the Reuters/University of Michigan Surveys of Consumers showed a rebound from a 28-year low. The reading – 61.2 in July, up from 56.4 in June – was higher than expected on Wall Street, but it was still considered low.

Falling gasoline prices may help bolster the stock market. In recent months, stock prices have been under pressure as investors have worried about the effect of high energy prices on the economy.

A continuing decrease in gasoline prices might also help Detroit, which has large stockpiles of SUVs. And retailers are watching as they prepare for the back-to-school season.

"If parents start to see this drop in prices, it might give them an extra $20 to $30 towards their child's back-to-school expenses," says Kathy Grannis, a spokeswoman for the National Retail Federation in Washington.

Gasoline prices are falling in part because demand for gasoline is down. According to the Energy Information Administration, gasoline consumption fell 2.5 percent in the first six months of the year.

With demand falling, "the refiners don't have much pricing power," says Mike Fitzpatrick, an energy analyst at MF Global in New York.

In addition, gasoline prices have tended to hit their peak around the Fourth of July in recent years. And gasoline supplies are about 6 percent higher than a year ago.

"We have gasoline coming out of our ears," says Phil Flynn of Alaron Trading in Chicago. "This is a perfect scenario for gasoline prices to start to come down."

In a spreadsheet sent to the Monitor, GasPriceWatch.com shows how much gasoline prices have fallen in various states and cities. For example, fuel prices have fallen 18.7 cents a gallon in California, but even more in Los Angeles (down 23.7 cents) and Fresno (down 27.5 cents).

However, the price has stayed high in other places, either rising slightly or having only small declines. Hawaii's prices, which are often the highest in the nation, continued to rise, climbing 4.4 cents per gallon to an average of $4.49 cents a gallon.

At the same time, oil prices are off about $20 a barrel from their peak of $145.18, which was reached on July 14.

Falling oil prices, if they were to continue or stabilize at the lower levels, could help a variety of industries, from airline companies to electric power generators: The airline industry is deeply in the red because of high fuel prices, and electric power generators are asking for substantial rate increases because of rising energy prices.

Falling or stabilizing oil prices would also take some inflation pressure off the economy. In an analysis sent to its clients, Lehman Brothers says that if oil prices were to fall $10 a barrel per quarter, then the inflation rate would drop to 1 percent. "The only way to sustain the high headline inflation of recent months is either to have a replay of the 100 percent increase in oil prices over the past year or to have a very sharp acceleration in core inflation [the inflation rate without food and energy]," writes chief economist Ethan Harris.

Oil prices may remain under pressure to drop in the near future. In June, Saudi Arabia said it would increase production by 300,000 barrels of oil per day. Then, earlier this month, it agreed to add another 200,000 barrels per day. "There is really no demand for it," Mr. Flynn says.

Some of the fall in oil prices is related to a stronger US dollar, Flynn says. The dollar had been weakening as investors worried about the US financial system. "The biggest sell-off in oil came after the US government said it would backstop Fannie Mae and Freddie Mac," he says.

Oil prices are also under some downward pressure with signs that the world economy is softening, says economist Scott Brown of Raymond James & Associates in St. Petersburg, Fla. "Europe is slowing. The emerging markets are starting to cool off," he says.

But oil at $125 a barrel is still expensive, Mr. Brown points out. "If we go below $100 or $90 a barrel," he says, "that would be a big plus for the consumer."