Gas Prices Tanking

Discussion
Oct 16, 2008

By George Anderson

The high cost of fuel has been directly blamed for much of the nation’s economic woes over the past year or so. But, the recent economic turmoil has brought with it one significant piece of good news. Gas prices are tanking, going from $147 a barrel three months ago to under $80 a barrel this week. The result has been significantly lower prices at the pump with consumers who spent over $4 a gallon just a few months back now paying about a buck less.

Chris Lafakis, an economist at Moody’s Economy.com, told Time magazine that the average price of oil in the third quarter was $117 a barrel. If the number came down to an average of $80 a barrel for this quarter it would deliver $40 billion in savings to the American economy. That is equivalent to a third of the economic stimulus package that showed up in the form of checks from the Treasury Department to U.S. taxpayers earlier in the year.

Mary Novak, managing director of energy services for the economic consulting firm Global Insight, said crude oil prices should drop even more although it doesn’t always add up to good news for consumers.

Ms. Novak estimated that 60 percent of gas consumed in the U.S. happens as people commute to and from work. With unemployment expected to continue rising, “you’re going to get a significant downturn in motor-fuel consumption,” she said.

Further declines in consumption would mean a “continued huge [downward] pressure on oil prices,” Ms. Novak added.

Discussion Question: Will lower gas prices mean a change in consumer behavior and what impact, if any, will it have on retail operations?

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17 Comments on "Gas Prices Tanking"


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Roy White
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Roy White
13 years 7 months ago
Taking a glass half full point of view, declining gasoline prices should provide some positives to an otherwise dreary economic outlook, particularly for grocery stores. In many parts of the country, the decline has been the equivalent of around a 25% decrease over the past month or so, and, while gas prices are much higher, year over year, the month-to-month drop is bound to produce a psychological effect on the American consumer prompting more leeway in shopping. That it will also help stretch budgets further isn’t all bad either. However, one important effect of the dropping price of crude will be to provide some relief to retailer distribution cost burdens since price trends in diesel have mirrored those in regular gas. Diesel peaked at $4.70 in July and dropped to $4.30 in August. By mid-October, diesel was $3.66 a gallon. In a recent Willard Bishop Competitive Edge, it was noted that a dollar increase in diesel fuel could trigger an over $900,000 distribution cost increase for a 100 store grocery chain. Using these numbers in… Read more »
Tim Henderson
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Tim Henderson
13 years 7 months ago

Gas prices have dropped by a few dimes, but I don’t see that having any major impact on shopping behaviors. The larger issue is consumer confidence, and that’s still a long way from rebounding. Lower pump prices are nice and it may make consumers feel a bit better about driving to grandma’s house for Thanksgiving, but they still have to deal with some of their crazy relatives once they get there–those relatives being the rest of the bad economic news.

Edward Herrera
Guest
Edward Herrera
13 years 7 months ago

What this can’t do is ease us off of energy dependence, and toward the energy independence we need in this country. It is by keeping the large amounts of money and jobs we ship across the ocean that will bring back spending.

No, this will not help, as customers already have needs for that extra income.

Mel Kleiman
Guest
13 years 7 months ago

We get one common thread–lower gas prices are coming too late and after a lot of other bad economic news, are not going to help sales. The only real hope is that the American public does not forget the quick lesson we have learned and pushes the government to develop an energy policy rather than the one we have had for 30 years, which was bury your head in the sand and don’t make the tough decisions you need to make until the pain is too great that you can not do anything else but treat it.

Look how the cancer has spread.

Ted Hurlbut
Guest
Ted Hurlbut
13 years 7 months ago
I think that the spike in gas prices was the canary in the coal mine that fundamentally changed consumers perceptions. It was so shocking and so dramatic that it had a psychological impact far beyond a gallon of gas suddenly costing over $4.00. I felt in April, in working with my clients, that we were beginning to see a rebound from what at the time had been a year long slump. Then gas prices exploded, and it clearly unsettled the consumer in a very profound way, it was so unprecedented. The environment has only grown even more unprecedented, far beyond gas prices. Markets are topsy-turvy, credit is tight and expensive, home prices continue to decline where real estate markets haven’t seized up altogether, and unemployment is climbing. That gas prices are declining certainly is positive for retailers, but now we’re fighting far more than just gas prices. I think consumers are likely to be very cautious about how they spend their money through the holiday selling season and into Q1 next year.
Art Williams
Guest
Art Williams
13 years 7 months ago

While the new lower gas prices are a welcome relief, I don’t see it having any positive effect on retail sales. People are in a bunker mentality right now and wanting to save any way that they can. I believe this will continue until they can see some genuine light at the end of the tunnel and get over their fear of recession or depression.

Buying a gas guzzler vehicle will not make any sense as we all know that this current reduction in gas prices is only temporary and cyclical. People are worried about inflation, losing their jobs and fear of the unknown financial situation. No one has any idea how bad this toxic mortgage really is yet, and the amount of other toxic debt that is not transparent. We are all waiting for the next shoe to drop and that doesn’t improve consumer confidence or spending. And lastly, the election casts a pall over the entire process.

Janet Dorenkott
Guest
Janet Dorenkott
13 years 7 months ago

Gas prices are coming down because demand is decreasing. This means more people are staying home and NOT shopping. Also, the economist is way off the mark by saying the $40 Billion is one third of the economic stimulus package. More like one eighteenth. The package was over $700 billion without the initial bailouts and future bailouts that are being discussed. Although it is good news that gas prices are dropping, people will use what little savings they get in the tank toward trying to replenish their retirement accounts and kids’ college funds.

Gene Detroyer
Guest
13 years 7 months ago
Back in the late 70s, we had our first gasoline shock. It initially changed people’s driving habits. Everyone was looking for better MPG. Higher MPG autos sold well. The government passed MPG guidelines. Once the shock passed, everyone quickly forgot about it and went back to their old habits. Today the situation is different. The consumer’s reaction to the recent stimulus package gives us a hint. This spring’s stimulus package was targeted to increase consumer spending and “get the economy going.” In fact, studies have indicated that most of the funds actually went to paying down debt. That is an indication of where the pressures are on the consumer. It is fair to say that the consumer’s situation has not changed in the last six months. If anything, discretionary spending has moved lower on the list of priorities well behind food, fuel and debt service. Any gains that the consumer is able to make because of a lowering of gas prices will not change the behavior we are seeing now. Those gains will first go… Read more »
Dick Seesel
Guest
13 years 7 months ago

There is no question that a strong sense of unease about personal wealth (401k and IRA values, housing prices and so on) is going to weigh on consumers’ willingness to spend during the fourth quarter. But keep in mind that the slowdown in spending really shifted into high gear at the point when shoppers were stuck paying $4.00 and higher for a gallon of gas during the summer. It had a much more immediate impact on pocketbook issues than the subsequent drop in the Dow.

So the quick drop in oil prices to the $3.00 level (and lower in some areas) is good news heading into the holiday season. It won’t cure the overall sense of economic malaise (to borrow a word from the 1970s) but will at least provide some tangible relief and some perceived increase in disposable income when it’s needed most.

W. Frank Dell II, CMC
Guest
13 years 7 months ago

Lower gas prices will not change the consumer’s shopping plans. Just as the stimulus checks went for paying down debt, lower gas prices will be used for debt reduction and basic products.

The decline in housing values, increased unemployment and limits on credit are the drivers. The American consumer is in a recession spending mode. With the decline in standard of living occurring, lower gas prices will help keep consumers close to even.

Doron Levy
Guest
Doron Levy
13 years 7 months ago

I asked a friend of mine who is a sales manager at a local Dodge dealership if he felt that the reduction in gas prices would spur sales in some of the bigger vehicles (for clarification though, gas prices in Toronto have not come down as fast as in other U.S. cities but I suspect we should be below the $1.00 per liter mark soon). He said woefully that the dealer was building inventory on Caliber and Compass models and that 3 years ago, it was the exact opposite, where Rams and Grand Cherokees were the heavily stocked.

Perhaps this economic situation has dealt a heavy blow to consumer confidence insomuch that even if the recession is short lived, retail spending may still be reined in. Unfortunately, it will take longer to rebuild all those nest eggs that were wiped out and I don’t see credit loosening up in the near term. Customers may not necessarily stop spending, but they will be looking for value will be scrutinizing purchases.

Jonathan Marek
Guest
13 years 7 months ago

I can comment on the sales side, and I presume others know more about the supply chain. My company (Applied Predictive Technologies) has analyzed this issue, and there is no question that gas prices had a statistically significant but generally small impact on certain retailers’ comps. Typically, it might be in 0 to 2% range. It’s a real effect for some, but certainly not enough to explain the much larger comp decreases we’ve seen.

On the good side of the curve, as gas prices have come down, I expect it also has a statistically significant but small positive impact. Unfortunately, if that means the comp is -8% instead of -9%, that’s not nearly big enough to maintain profitability. And it’s not nearly enough to stave off a bad analyst call.

Max Goldberg
Guest
13 years 7 months ago

Lower gasoline prices, while welcomed by all, will have little or no impact on consumer spending. Gas prices have not fallen enough to impact family budgets and the current economic mess is providing families even more headaches than high fuel prices.

David Livingston
Guest
13 years 7 months ago

We all want lower gas prices. But the average Joe out here in the suburbs has probably lost a million dollars on paper this year in a weak stock market and lower property values. If I had to trade, I’d take the $4 gas if I could get my money back on my investments.

Gene Hoffman
Guest
Gene Hoffman
13 years 7 months ago

Gas prices have lost much of their power to create anxiety. Lower gas prices alone won’t change buying habits; other things have been more important to consumers. But in the marketplace there are still many consumers who feel that solvency is a sacrifice and those are the ones retailers should focus on.

Brent Streit Streit
Guest
Brent Streit Streit
13 years 7 months ago

Diesel fuel is still higher than gas so that may not help the retailers as much. I do like the theory that it is a stimulus package type of cash infusion into the economy.

One of the disturbing trends recently is that lenders, especially Bank of America, are telling consumers that they can’t use their credit cards unless they “opt out” and stop using them. Well, they tell people with high credit scores and no missed payments that their APR will go up to 29.99%. This is the credit crunch and we know that the “universal default” clause allows these companies to all raise rates for even late payments. Knowing that many retailers rely on people to spend outside of their means using store credit makes me wonder if this is too little too late. Is that $40 billion boosting the economy or just helping people stay afloat at the moment?

Mark Lilien
Guest
13 years 6 months ago

Reduced gas prices certainly help retailing. But higher unemployment trumps gas prices. Blue collar manufacturing workers aren’t the only ones afraid lately. What about the folks in financial services, construction and the real estate business?

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