Tuesday, May 24, 2011

Gas prices dropping in Metro Detroit

The last time I blogged about gas prices in Metro Detroit, I wrote:
Eleven gallons of unleaded regular cost $45.00. Good thing it will last me a month. The bad thing is that it will be more expensive the next time I buy gas and even more expensive the time after that and the time after that.
I just filled up this past Friday, and I didn't pay more. I paid less, as unleaded regular was $3.81/gallon. Yesterday, it had fallen to $3.77. Looks like I was wrong, so far. However, I don't mind being wrong on this count, as it shows that people are cutting back on oil consumption, which is a good thing. It also might be good for the economy, as that money that would be spent on gas can be spent on other things.

So, what happened? This did: Oil prices drop 10% in one day, which isn't entirely good news
The oil markets have been doing this dance for a year now. Just about every time oil's share of U.S. GDP starts to pass 4%, Hamilton's magic number for contraction, the price drops. The traders are acting as if they know what that 4% share (or the 6.5% of personal income spent on energy) means and they sell off.
The irony is that, while drop in oil prices resulted from data indicating sluggish economic conditions, something Calculated Risk showed was happening as oil prices began to spike, the effect on the ground was increased optimism, as one can see from the WOOD-TV videos I embedded. The ones before the price drop are about supporting rapid transit and people moving into the downtown core of Grand Rapids, exactly the kinds of rational things people would do when gas prices go up. The ones afterwards are about buying cars, improvement in local tourism, and economic growth.

The trend has continued. Bill McBride at Calculated Risk posted yesterday that Gasoline prices down 9 cents over last two weeks for the U.S. as a whole. Here in Metro Detroit, the price has fallen even more, with the Free Press reporting yesterday that AAA of Michigan finds gas prices down 23 cents in past week. The average price is now $3.87/gallon. The good news is that it's the third consecutive week of decline. The bad news is that it's $1.14 more than at this time last year. Even so, another article in the Free Press shows optimism among consumers, even if that hasn't translated into increased demand.
Consumers planning to travel over the upcoming Memorial Day weekend will welcome the modest easing of pump prices after the rapid rise from late February through the first week of May. Prices in Michigan have dropped in each of the past three weeks, according to AAA’s daily survey of 2,800 gas stations in the state.

“Things seem to be a little better,” said Ed Weglarz, executive vice president with the Associated Food and Petroleum Dealers of Michigan. “There’s some enthusiasm among consumers that we’re back below $4. But our members haven’t seen an uptick in demand.”
As I recall the last time the prices spiked, the price level that results in a change in consumer behavior is $3.50/gallon. We're still above that.

As for the long-term effect, Bill McBride at Calculated Risk had the following to say.
It might be too early to see an increase in the Reuter's/University of Michigan's Consumer sentiment survey due to falling gasoline prices. Right now analysts are expecting a slight increase for May to 72.5 from the preliminary reading of 72.4. But if this trend of falling prices continues, I'd expect some improvement in June. (Note: Usually the two main drivers of sentiment are the unemployment rate and gasoline prices).
Calculated Risk also has a link to a dynamic chart at Gas Buddy showing national and local prices. I'd install the widget, but I'm too lazy and short of time right now.

As for the result, maybe this trend of lower prices will keep going for a while. The business as usual people will sure hope so.


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