With Oil's Collapse, Motorists Should Feel Relief

For months many industry analysts have said oil prices were much higher that market fundamentals dictated. For months, oil prices stubbornly hovered around $100 a barrel, with motorists feeling the pain at the gas pump.

Apparently it took a U.S. credit downgrade, a European debt crisis, irrefutable evidence of a slowing economy and a stock market meltdown to bring oil prices into alignment. The price of crude oil plunged Monday, with West Texas Intermediate light sweet crude closing below $82 a barrel.

Should that price hold for a while, U.S. gasolines prices – at least in states that use WTI instead of the more expensive Brent – should plunge from their present lofty position.

Already the retail price of gas is beginning to reflect the carnage in the futures market, with the national average price of self-serve regular at $3.65 today, according to AAA. That's down from $3.70 a gallon on Friday and the peak of $3.98 a gallon on May 5.

Deja vu

The recent economic turmoil has been compared to 2008, when stocks took a nose dive in the wake of the Lehman Brothers' bankruptcy and Congress bailed out the nation's large banks. At the time, gasoline prices were coming off their highs of over $4 a gallon. As the price of oil plunged to about $40 a barrel, gasoline prices quickly fell to below $2 a gallon.

It's far from clear such a free-fall would be repeated. A lot depends on how markets react in coming days.

What has happened in the last week has been an abrupt sea change in the prevailing wisdom. Before last week, the assumption was that the economy would continue to grow, albeit slowly. And a growing economy, as everyone knows, requires more energy.

To get ahead of the curve, investors remained bullish on oil, if not bidding up the price, at least providing a floor at around $100.

But now the prevailing wisdom that the economy is slowing, and that we could actually fall back into a recession. With little or no growth, the world needs less oil, hence the price adjustment.

Relief at the pump

The adjustment should bring relief in the next few weeks for long-suffering consumers, but the question is, will it last? In 2008, gas prices declined but started rising again less than a year later.

If the markets are overreacting, as they have tended to do lately, there could be a snap back in the opposite direction in the not too distant future. So when gas prices fall, consumers should enjoy them while they can.