Oil Prices Plunge, Will Gas Prices Follow?

For months economists and industry analysts have said market fundamentals did not support $100 a barrel oil, yet oil prices stubbornly hovered around that level. Now, that seems to have changed, big time.

As Wall Street went into a free fall this week, so did oil prices. Light sweet crude for September delivery fell below $89 a barrel at midday. Even Brent crude, which has remained much more expensive that U.S. oil, dropped nearly three percent today.

Stocks and oil are down for much the same reason. Recent economic data suggests the U.S. economic recovery has stalled. Data from other countries has also been disappointing, convincing the markets that another global recession is possible.

Less demand for oil

With economies in recession, the reasoning goes, there is less need for oil, so that present supplies, which have remained plentiful, can be stretched even farther.

If oil continues to fall, consumers can expect to see lower gasoline prices. In the futures market, where wholesalers buy their fuel to sell to gas stations, reformulated gasoline for September delivery was down about four percent in today's trading.

Gasoline at the retail level, of course, is slower to react. The national average retail price of self-serve regular today is about $3.70 a gallon, according to AAA, and has been in that range over the last few days. Chances are, that average price should begin dropping over the next few days.

A repeat of 2008?

How low will it go? It all depends on whether fears about a recession actually come true. One only has to rewind the clock to about this time in 2008 to see a parallel. After gasoline prices peaked at over $4 a gallon in July, the economy went into a freefall in September. By the end of the year, gas prices were well under $2 a gallon.

This year gas prices peaked right under $4 a gallon in early May, with the economy showing signs of weakness at the end of July. Is there a link between $4 a gallon gas and a recession? That's something for economists to argue about.

What can't be argued is that $4 a gallon gas places a heavy burden on consumers, many of whom are operating on the same, or less income over the last few years. No one wants to see a recession, but for consumers, relief at the gas pump may be a silver lining.