Three Factors to Consider as Gas Prices Hover Under $2 a Gallon
Posted on October 29, 2015 by Marketing and Communications
Everyone loves a bargain, so what’s not to love about low gas prices?
As it turns out, there are a few reasons why they might not be the boon everyone thinks — particularly on the Gulf Coast, where many jobs are tied to the oil and gas industry. U.S. oil futures were just above $45 a barrel on Wednesday, and the price of a gallon of regular gasoline in Alabama this week was $1.92, nearly $1 lower than last year at this time, according to AAA.
Dr. Kyre Dane Lahtinen, assistant professor of finance at the University of South Alabama’s Mitchell College of Business, shares three reasons why lower energy prices can be problematic.
1. Low gas prices have a negative effect on the oil and gas industry, especially on the Gulf Coast.
As gas prices fall, then production—which is expensive for operations such as deep-water drills—is less profitable for oil companies. As prices fall below the cost, companies shut down production. Less production leads to fewer jobs. The Gulf Coast is home to a significant number of businesses that revolve around the oil and gas sector, so this aspect has a particularly damaging effect on the region. Gas and oil production are not a huge part of the economy overall, but it’s a big enough industry and important to specific regions, including ours.
2. Lower energy prices can mask other, less favorable changes in the economy.
Energy and food prices are included in the main inflation figures released by the government through mass media. Currently, with energy and food prices included in the calculation, inflation appears to be at zero. But when energy and food prices are excluded, the inflation rate is actually 2 percent. When shopping, consumers encounter increasing prices on items such as clothes, airline tickets or other goods. But since the information they receive indicates that inflation is stagnant, customers might not have a clear understanding of why prices are higher.
3. When gas prices fall, consumers shift to less fuel-efficient vehicles.
Low fuel prices mean less incentive to buy fuel-saving vehicles. People tend allocate a certain portion of their budget for a particular activity. If someone plans to spend $200 a month on gas, whether that buys them 50 gallons or 100 gallons, they plan the same budget allocation. As gas prices fall, it allows consumers to buy more gallons or drive less efficient vehicles, but still keep their budget allocation for gas at the same level.
However, gas prices have been very volatile over the past decade, so prices could easily rise again. Those who bought less fuel-efficient vehicles when gas prices were low may feel a squeeze on their budget as gas prices rise.
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