Current Drop in US Gasoline Prices may Signal Recession

Although the recent drop in gasoline prices is celebrated by many, some warn that it may signal recession. The people giving the warning do not have to dig way back into history to support their claim.

The early parts of summer 2008 was the last time that gasoline prices neared the $4 per gallon mark. After which, prices at the pump began to drop, most likely because driving was minimized by many motorists in order to save money.

Then, before the close of summer 2008, the United States was hit by a financial crisis. The credit systems of banks froze and the recession reached its peak with many people losing their jobs. Together with this, the worldwide demand for gasoline dropped sharply. Gasbuddy.com showed that the average gasoline price in San Antonio reached its peak in July of 2008 at a per gallon price of $3.95. The sharp decline that followed brought gasoline prices to $1.43 in January of 2009.

Once again, it appears that the demand for gasoline all over the world has weakened. The demand in the United States is higher compared to last year, but in Europe demand has fallen. Moreover, gasoline supplies in the U.S. have increased, the economy of China is slowing down and there are no supply issues expected this summer season.  As a result, gasoline prices this summer should stay lower than their peak levels last spring, especially on the West Coast where several refineries had not been operating.

The Energy Information Administration of the United States, in its recent estimate, projects the national average price of gasoline this year at $3.71. Moreover, they expect it to drop to $3.67 in the coming year. Although that appears to be good news for drivers, it signals that global economic growth is not going in a positive direction.

San Antonio Federal Reserve Bank senior economist Mr. Keith Phillips said that a majority of people are concerned with the increases in gasoline and current crude oil prices, and not on decreases that cause economic weakness.

He said that if U.S. recessions are analyzed since the early parts of the 1970′s, gasoline and oil price increases preceded most of them. If the economy of the world suddenly slows down, it can lower demand as well as gasoline and oil prices, which can also impact U.S. export demand and lead to the weakening of the country’s economy, Phillips added.

Further, a drop in gasoline prices, if caused by a sharp decline in economic activity worldwide, can happen before the U.S. economy weakens, even if it will not be the reason for the weakening. The yield curve of the interest-rate, which is a stronger signal of a recession in the United States, so far is not pointing to the economy’s decline,  since short-term interest rates stay lower than the long-term rates.

Europe experiences a slowing down of its economy with a crucial election in Greece happening in the middle part of June that may lead to another crisis in its financial industry which also has consequences for the whole world.

That could be one of the worries that lower the current gasoline price.

By: Chris Termeer