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Tumbling Gasoline Prices Pumping up Consumers' Wallets

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January 21, 2015

Reach into your pocket and pretend you’re about to pull out a wad of bills: $500, $600 … maybe even $800.

In effect, that’s what’s unfolding for American motorists as oil prices plunge below $50 a barrel to the lowest levels since 2009. This means consumers are forking over less at the gasoline pump, which is money that can be spent elsewhere, or even socked away.

In mid-January, regular-grade gasoline was hovering near six-year lows at just a few cents above $2 a gallon, based on nationwide averages. It wasn’t long ago that gas was around $3.50, or above $4 in some cities.

For all of 2015, U.S. motorists will save an estimated $500 to $800 in fuel costs per vehicle, assuming prices stay subdued, says Patrick DeHaan, senior petroleum analyst at GasBuddy.com. In 2014, motorists spent an average of $2,028 per vehicle.

This year, drivers won’t “leave their paychecks at the pump,” DeHaan said. They’ll save $15 to $25 per fill-up, compared with peak pump prices last year, he added.

FIGURE 1: DRILLING DOWN. Crude oil futures dropped from nearly $108 a barrel in June 2014 to a six-year low of about $45 in mid-January. Gasoline prices followed. Source: TD Ameritrade’s Trade Architect. For illustrative purposes only.

To a large extent, cheaper gasoline reflects the shale-drilling boom in North Dakota, Texas, and elsewhere that’s propelled U.S. oil production to an average of over 9 million barrels a day. That’s nearly double the levels from a decade ago.

“What occurred in 2014 was nothing short of a paradigm shift in favor of North American energy producers and consumers, at the expense of OPEC and the Middle East,” said Gregg Laskoski, senior petroleum analyst at GasBuddy.com.

This isn’t necessarily unqualified good news for everyone, especially if your portfolio includes energy stocks, which were slammed by the oil market’s slump. Still, U.S. consumers are broadly expected to benefit. Many economists compare the drop in gasoline prices to a tax cut, pointing out that it boosts economic growth by generating money that can be spent on a variety of things: new clothes, appliances, electronics, trips, and so on.

Yet according to GasBuddy, many people apparently intend to take the money they won’t spend on gas and use it to pay bills or build up rainy-day funds (see figure 2).

FIGURE 2: FUEL FOR THOUGHT. More than 80% of people plan to funnel money saved on fuel costs toward paying bills or savings, according to a GasBuddy survey of more than 100,000 motorists. Source: GasBuddy.com. For illustrative purposes only.

Just remember, lower gasoline prices don’t materialize into actual savings unless you bank them somehow. Like investing in a stock that’s gained in price, you don’t realize any profit until you close out the trade.

You might want to think of that the next time you fill up. Map out mental notes on possible avenues for those extra dollars. What might you do with an extra $500 this year?

Energizing Your Portfolio

Learn about potential ways to invest in the oil and gas sector in a January 15 webcast led by Stewart Glickman of S&P Capital IQ.