Indianapolis residents have benefited in recent days from lower gas prices, a trend that is likely to continue as we approach a time of year when prices typically begin to rise. This will provide relief at the gas pump in addition to helping the economy as Indianapolis consumers spend a greater portion of their incomes on things other than fuel.
But it’s not just local residents that benefit. This is a worldwide phenomenon thanks to lower crude oil prices. In the weeks leading up to today, crude prices have fallen to roughly $89 per barrel—a significant improvement versus the January 2013 average of $99 per barrel.
Nationwide, gas prices have fallen by an average of 7 percent, or 27 cents per gallon since the last week of February. Here locally, prices have hovered around $3.70 per gallon, down 6.4 percent versus the mid-March average of $3.93. As of this writing, Indianapolis gas prices range from $3.49 to $3.75.
Commodities analysts are predicting a drop in prices of as much as 20 cents by the end of June.
So why the falling prices at a time of year when prices typically rise? Globally, there has been a significant increase in supply. Combined with lower-than-anticipated demand in the U.S. and China, the world’s two largest gas consumers, gas prices were bound to fall.
A Boon to the Economy
Less money spent on gas means more left over to buy things that actually matter, like food, healthcare, recreation, etc. Not only that, but because it costs less to transport goods consumers can expect generally lower prices. A 10-cent drop in gas prices might not seem like much, but it equates to roughly $13 billion saved nationwide. Another benefit to lower crude prices is lower diesel and jet fuel prices, which means cheaper flights and cheaper transportation costs for other energy-intensive businesses.
“As a real estate broker my business doesn’t depend on fuel per se, but my agents are certainly affected by higher prices,” says Mike Woods of msWoods Real Estate. “Driving clients around to look at houses takes gas, and that’s a drain on their bottom line.”
Other Factors Keeping Prices Down
Typically, gas prices rise toward the end of winter as refiners must shut down portions of their refineries to perform maintenance and repairs. Add in the cost of meeting federal clean-air regulations and you have a recipe for higher prices. While this same trend was definitely felt this year, it failed to meet or exceed last year’s peak price by 15 cents. Plus, increased oil production domestically as well as in Canada has contributed to greater supplies.
While the world hasn’t been a model of peace, many of the disruptive political events that occurred last year, such as those that affected the Middle East, have not materialized this year.
Demand for oil in China, the world’s number-1 importer of oil, has not grown as fast as anticipated due to an economy that has not matched expectations. This combined with the fact that nearly all of Europe is in recession means lower oil consumption.
Lower-than-expected domestic consumption was also a factor, as heavy winter snowfall in several parts of the U.S. meant fewer drivers on the road.
Lower gas prices means people are less reluctant to venture out of the home. And the money saved by lower prices means maybe eating out an extra time or two. So it is not a trivial thing. In a way, it’s like getting a pay raise.
An economic report recently released by the U.S. government indicated the economy grew at a rate of 3.1 percent, a significant improvement versus the final quarter of 2012, when the economy grew at an anemic rate of just 0.4 percent.
Both, shippers and airlines have benefited immensely from lower fuel prices. Airlines for America, an aviation industry group, estimates commercial aviation is responsible for roughly $1 trillion in annual economic activity and 10 million well-paying American jobs. Clearly, lower fuel prices help the airline industry save on what is by far its biggest cost of doing business. Plus, lower ticket prices mean more paying customers.
It’s hard to say how long the relief will last. The word is an unpredictable place and there is no shortage of possible threats to lower prices. Factors such as political turmoil, refinery problems and other crises can happen at any time. Plus, as developing countries continue to grow, so does their appetite for fuel. Unfortunately, crude oil is still the life blood of the world economy. What’s more, the powers that be don’t have any interest in seeing prices fall too far. Simply cutting production is all it takes to stem the decline in prices. For now at least, we can look forward to a little extra disposable income in the coming months.