The price of gasoline should go lower in September. That is at least what crude oil futures are indicating after a sharp drop in the last week. If it occurs, it should be great news for those who have been heavily pinched by inflation. But how good is the news in the larger macro picture? Oggonomics wants to show what these savings mean for you and the economy.
As crude oil has drifted down to about $72.00 per barrel (per TradingView) in front-month futures, those same front-month crude futures are now down about 7% in the last week. They are down an even sharper 9% over the last month. Futures prices for diesel and gasoline have also followed crude oil lower.
The U.S. economy and prices of many goods are still very much at the mercy of oil prices. Lower oil costs generally translate to lower prices at the pump. That will be great for consumers and businesses which have to pay high transportation and energy costs. It’s bad news for oil companies and it is actually a “less than stellar” reflection of the U.S. economy as a whole.
Energy traders have unwound some of their long positions after weaker domestic demand than had been expected this summer. Weaker demand from China, as well as its ability to get oil from Russia and India, also played a role here. The EIA showed a 4.6-million barrel decline in crude oil inventories for last week. Gasoline and distillates also drifted lower in storage.
Perhaps the biggest blow is that the U.S. jobs market just wasn’t as strong as it has been portrayed by the U.S. Department of Labor. The annual period which ended in March was revised lower by an astounding 818,000 fewer jobs created than had been previously reported. That is far greater than an insignificant revision. It means that the average monthly gains of 242,000 initially reported was actually about 174,000 on average instead. Even CNN admitted that this was the largest single revision since 2009 (during the Global Financial Crisis). This report also adds insult on top of injury as job growth has been slower in 2024.
The U.S. average cost per gallon of regular gasoline was about $3.38 on last look using the GasBuddy average. That’s down from about $3.50 at the end of July. Whether or not prices at the pump drop to $3.00 per gallon in the next month or so remains up for debate, but that was the average in late-2023 and the current price is down more than 10% from a year ago. That should represent a 10% boost to gas-buyers’ portion of disposable income that would have gone to filling up gas-guzzling cars and SUVs.
Think about this financial saving math for a minute. Let’s say you drive an SUV 12,000 miles per year and assume you get 15 miles per gallon averaging highway and city driving. The 800 gallons per year at $3.50 per gallon is a $2,800 annual spend. If gasoline drops back down to $3.00 per gallon the annual cost is $2,400 to fill up your car — an extra $400 annually that can be used for other disposable income items or for investment and savings. And every 10-cent drop in gasoline translates to about $80 per year in savings under that SUV scenario. Now keep in mind that there were over 283 million registered vehicles in the U.S. in 2022. Of those, crossovers, SUVs and trucks are among the most popular.
Electric cars are not going to have a material impact on gasoline demand quite yet. Goldman Sachs even recently opined that “peak oil” may be more than a decade away. The fleet of U.S. EV autos was only about 6.8% as of May 2024 according to Edmunds — and 82.4% of all unit sales were entirely gas-powered. Let’s just say that nearly 100% of the heavy duty fleet is powered by diesel and gasoline an likely to remain that way for years. And 100% of the jet market is powered by jet fuel that comes from the same barrel of oil. It’s going to be a long time, particularly with the backlash in EV demand, before gasoline and diesel are not powering the U.S. air and road transportation system.
The verdict is out on what this all means for flying commercial airlines. It remains to be seen whether the airlines will pass the savings on to consumers or whether they just pocket the savings. Chances are high that if you have flown recently you noticed that all those “deals” from the past just are not as easy to find — and if you do get a deal it quickly gets eaten up by ticket fees, parking and transportation costs to and from the airport.
The ongoing dilemma about lower gas prices is that it makes the all-in cost of EV ownership just that much more unattractive. This means that states with EV mandates like California are force-feeding much higher costs to own and operate a vehicle. With higher interest rates, lower demand from consumers, and awful trade-in values, many U.S. consumers who are still able to have a choice on what they buy are choosing old-fashioned combustion engines over electric-powered engines.
