Downside of cheaper gas

Well, it's not exactly the downside - it's just that the upside isn't here yet. The latest government survey has the average price of regular in the L.A. area at $4.109 a gallon, which is down around 11 cents from a week ago and about 50 cents lower than the peak in mid-June. My fill-up this morning was eight bucks cheaper than what I was paying a few weeks back, a noticeable savings though not quite enough to put a downpayment on a house. We’ll see further drops in the coming weeks, but the economic benefits are likely to be smaller - at least for now - than the economic costs when prices were skyrocketing.

Conspiracy theorists say that it's all the oil companies' doing, but the economy is way too messy for that. This is not a Frederick Forsyth plotline. An auto maker isn't about to reopen a shuttered factory and rehire thousands of workers on merely the hope that people will start buying SUVs again. An airline is paying less for jet fuel, but not nearly enough to warrant putting an end to those luggage fees. Here's the thing: higher oil prices can cause recessions, but lower oil prices will almost never spur recoveries. For that to happen, the economy has to be ready to expand. Right now, the main reason for the drop in oil and gas prices is a drop in demand, which is the result of little or no growth. In other words, the numbers are falling for the wrong reason. From CNBC:

For Corporate America, the benefit of lower oil prices will largely flow to the bottom line. Package delivery companies, plastics makers, food manufacturers and a host of other businesses have raised prices this year, and they are not in any hurry to reverse course. While stronger profits would be good news for the U.S. economy, until companies are convinced that demand is improving, they are not likely to step up production or hiring, which would provide a much bigger economic boost. Lower oil prices alone cannot fix the underlying problems of slowing global demand and tightening credit conditions.

It's not just companies that must be convinced about lower energy prices. Consumers, too, must be comfortable enough to start using those gas savings to take the family out to dinner or buy the kid a new iPod. Eventually that will happen, but we’re probably talking months, not weeks.

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
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