Bad News Sends Gas Prices Racing Downward

Just as fast as gasoline prices rose, they are now in retreat, and the trend is likely to continue.

Monday's AAA Fuel Report Gage puts the national average price for a gallon of regular at $3.703. That compares with $3.970 a month ago, though it's still far above the average of $2.701 a year ago. Several factors could push gas prices below $3.50 a gallon over the next several weeks, and almost none of them were part of the economic landscape a quarter ago.

The most obvious cause for a drop in gas prices is that the U.S. economy no longer appears to be growing. May unemployment data showed that only 54,000 non-farm payroll jobs were added in the month. Weekly initial jobless claims have stayed above 400,000, which confirms job losses continues to undermine the economic expansion. One of the most troubling aspects of the unemployment figures is that the number of people who have been without jobs for more than 27 weeks has reached 6.2 million. These people are close to exhausting unemployment benefits in many states. This means consumer spending among this group could drop to nearly zero.

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One effect of high gas prices is that fewer people drive and many who do drive travel less -- self-evident, perhaps, but worth mentioning anyway. Lower demand has probably been a critical factor in the decline gas prices.

Likewise, international demand has almost certainly had an effect on U.S. gasoline prices. China's economy has slowed somewhat, based on its PMI. Higher interest rates mandated by the central government in Beijing are tightening that nation's money supply, which puts another drag on GDP growth in the world's second-largest economy. Economic activity also continues to slow in some of Europe's largest nations. Unemployment is above 20% in Spain and shows no indications of improving. New austerity programs across the continent are often married with tax increases, both of which can be a drag on consumer activity.

Low output from major oil producers seemed to have been a cause of increasing crude prices last month. But recently, OPEC members were haggling over what their export levels should be. Saudi Arabia, by far the largest member of the cartel, has broken with other countries in the alliance and said it will sharply increase crude exports.

Many of the factors that are likely to push gas prices still lower are bad signs for the broader economy, but at least the cost to drive has fallen. Most signs point toward that trend continuing.
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