Lower Gas Prices Come Amid Economic Woes
Standard & Poor’s (S&P) Friday downgrade of the U.S. credit rating, combined with Wall Street's worst selloff since 2009, may be a temporary boon for Americans and companies struggling to keep up with gas prices. However it may also be a dire warning that many investors believe America is headed for another economic downturn.
Following last week's bad economic news, crude oil fell almost 5 percent to below $83 a barrel, according to AAA Auto Club. As a result, the average price of gasoline nationwide dropped slightly to around $3.70 a gallon. However, some believe crude oil prices and gas prices at the pump could fall even further.
"If crude oil stabilizes or continues to decline, motorists will undoubtedly begin to feel some relief at the pump in the coming weeks," said John B. Townsend, manager of public and government affairs for AAA Mid-Atlantic, in a statement.
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AAA estimates gas prices could end up somewhere between $3.00 and $3.25 a gallon.
In the near term, this is encouraging news for both consumers and businesses.
David Kreutzer, research fellow in energy economics and climate change at The Heritage Foundation, says when commodities such as crude oil dip, it makes products and services more affordable.
"Gasoline prices will be cheaper, manufacturing costs will go down; all of the things that go up when the cost of petroleum goes up, goes down when it goes down," he explained.
However, in the long-term, Kreutzer warns declining crude oil prices could mean bad news for America's future.
"It's an indicator that people are worried about the economy," said Kreutzer.
He explains that oil traders are leaving the commodities market in anticipation of lessening demand. A drop in demand results when there is a drop in income.
A similar situation occurred in 2008 when petroleum prices fell sharply. The drop was followed by a financial crisis and the $700 billion TARP bailout.
Last week, despite congress breaking the debt ceiling stalemate, Standard and Poor's lowered the credit rating on the national debit from AAA+ to AA+ for the first time in history. News of a troubled U.S. economy led to a massive Wall Street sell-off that began late last week and continued into Monday.
Some traders who are concerned about this dilemma are switching their investments to gold. Bloomberg reports that gold futures, seen by many as a safe bet in the midst of financial uncertainty, rose to just over $49, setting the record for biggest gains since March 2009.
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President Barack Obama released 30 million barrels from the nation’s emergency oil reserves in late June to match the 30 million barrels being released abroad in hopes of lowering gas prices.
When asked if this recent decline in oil prices could be, in part, a reflection of Obama's oil infusion, Kreutzer said, “not a chance.”
"We saw a very minor dip down immediately after the policy was announced," Kreutzer said. He suggested the impending drop in gas prices "is not any kind of echo effect of that [higher gas prices]."
While the downgrade has left American markets weaker, there are some good signs.
Gas prices are still 93 cents higher than this time last year. Additionally, U.S. Treasury bond prices are still soaring, reports Reuters.
"What appears to be happening is the financial situation in Europe is worse than it is here," said Kreutzer.
European Union members Spain and Italy are also struggling with debt issues and may be on the verge of financial collapse, he added.
"So people have actually been moving into the dollar in spite of the downgrading of the U.S. debt," explained Kreutzer.
The debt deal President Obama signed last Wednesday included a provision mandating that lawmakers in both the U.S. House and Senate come together to make over a trillion dollars in cuts and reforms.
"If we're lucky, and they (joint committee members) make the cuts wisely, that will add confidence to the people in the markets and hasten a rebound from whatever's happening today and help the economy grow," concluded Kreutzer.
