With the cost of gasoline spiking to more than five bucks a gallon near mid-June, many drivers began imagining an apocalyptic future where the pain at the pump could one day hit double digits. Fortunately, the opposite scenario is so far materializing, with rates of the critical commodity declining noticeably. Currently, a gallon of regular unleaded goes for just under $4.47 nationally, leading to inquiries about gas prices dropping.
According to a Reuters report, softness in the futures market for both crude oil and gasoline has led to gas prices dropping significantly from prior highs. Primarily, the Federal Reserve’s broadcasted commitment to attack soaring inflation through raising the benchmark interest rate has spooked investors. Under a hawkish monetary policy, quality (or predictability) of earnings takes precedence over growth-oriented investments.
The result, per Reuters, is that:
U.S. demand for gasoline, jet fuel and diesel is down more than 10% compared to 2019, before the pandemic began, according to the Energy Information Administration. Gasoline stations have responded by lowering prices.
Further, the news agency notes that because crude oil is generally priced in dollars, American consumers comparatively benefit from a stronger greenback, thus leading to gas prices dropping. Earlier this week, “the dollar index, which tracks the currency against a basket of six counterparts, climbed to 108.56, its highest level since October 2002.”
Should Drivers Depend on Gas Prices Dropping?
When deciphering the narrative behind gas prices dropping, it’s important to recognize the complex variables that go into the equation. Mainly, supply and demand dynamics present the heaviest influencer. A modification to either side of the equation — as investors saw in April 2020 when crude oil prices temporarily went negative — can result in sharp, sometimes violent swings in valuation.
However, in the current cycle, gas prices dropping stem from “bad” reasons, specifically, Americans driving less due to the hit to their budgets, according to CBS News. This context implies that the economy could slip into recession. This would be a deflationary outcome not only for petroleum but for virtually every other industry.
Another factor to consider is geopolitical. Certainly, Russia’s military aggression in Ukraine and the corresponding shelving of much of global energy resources as part of tit-for-tat responses to sanctions have sharply cut into supply, thus raising demand. As well, the oil cartel of OPEC always presents an important catalyst.
Ultimately, gas prices can decline if current economic and geopolitical trajectories hold steady. But should drivers lose their job in the process, the overall net impact would be deleterious.
Why Going Electric Might Not Save the Day
Gas prices dropping also presents an intriguing framework for electric vehicles (EVs). With prices soaring earlier this year, many consumers rushed to purchase EVs in a bid to save on fuel costs.
However, Kelley Blue Book reported that in January 2022, the average transaction price for an EV hit $62,876, far higher than the automotive industry average of $46,404 per each vehicle. Essentially, only people with higher incomes are able to make the pivot to electric. At the same time, these consumers are not the ones hurting the most from high gas prices.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.