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Dramatic Gas Price Drop May Not Be Good News

The big news this morning is a dramatic drop in fuel prices by the time Halloween rolls around – and that's not entirely good news.


It's good news for consumers in lots of ways. Lower fuel prices can ultimately mean lower costs of goods because, basically, everything moves by truck in this country. It's also good news simply because we'll be paying less at the pump. HIS Global Insight economist, interviewed in USA Today, says a drop to $3 a gallon could mean roughly $114 billion in extra consumer spending power.

The article also had this to report. Thursday, benchmark West Texas Intermediate crude oil fell 4 percent to $78.20 a barrel, the lowest price since early October and off 20% year-to-date. Coupled with slumping wholesale gasoline contracts for fall delivery, "the market is suggesting gas below $3 by Halloween, and certainly by Thanksgiving," says Tom Kloza of the Oil Price Information Service. Nationally, regular gasoline averages $3.47 a gallon, down 47 cents from this year's high in April.

So, why is all of this a problem? On the new car front, it's going to create a glut of compact and sub-compact cars at a time that manufacturers are ramping up production of them. OEMs, reacting to rising gas prices the last couple years, started to emphasize the need for compacts. Americans started buying them out of fears that gas was going to eventually hit $5 a gallon.

Now, with our classic short-term memory problems, Americans are going to start buying less fuel-efficient vehicles. Manufacturers are poised to have supply problems in the form of a glut of compact vehicles. It could lead to manufacturers having big losses in the compact segment, which hurts development of new compact vehicles.

Interestingly, the drop in gas prices should mean a corresponding price in diesel prices. This could come at a good time as more Americans develop an interest in diesel vehicles.

Of course, there are also going to be political implications as well, which could be a good or bad thing depending on your point of view. Lower fuel prices, along with lower unemployment figures, and a growth in consumer spending will always benefit an incumbent regardless of political party (remember the slam against George Bush in 1992? It was "It's the economy stupid.").

The drop in fuel prices is also going to have an impact on the used car industry. Dealers snapped up compact cars at inflated prices. As gasoline has dropped, so has the value of those used cars. For once it's going to be true when a dealer proclaims in their ads, "We're selling these cars for less than we paid." That could put a lot of independent used car dealers out of business. That leads to less competition and high prices again for used cars.

A drop in gas prices is going to good news for consumers but the long-term impact could end up hurting us. Time will tell how nationwide gas prices below $3 a gallon play out.