$3 Gas

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The price of a regular gallon of gas nationwide reached $4.99 in June 2022 during the early months of Russia’s invasion of Ukraine. The war had pushed oil above $100 a barrel. Since then, gas prices have moved downward in most months, and this week, they reached $3 for the first time since mid-2021. The drop positively affected the economy and is one of the reasons the US did not go into recession in 2023. It should support the economy early this year. 

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According to the AAA, 30 states have gas prices below $3, and the national average is $3.01. A year ago, the figure was $3.30. Because oil supplies have climbed sharply in the last several months due to, among other things, American fracking activity, gas prices could go even lower. Today, the price of oil is just above $70 a barrel. In October, the comparable price was above $90. Among the reasons is that daily US oil output has risen to an extremely high 13.2 million barrels daily. 

The effect of energy prices on CPI cannot be underestimated and is among the primary reasons inflation has dropped from over 8% in early 2022 to closer to 3% recently. In March 2022, the CPI rose 8.5% year over year. The price of motor fuel rose 48.3%. In November of last year, the CPI rose 3.1%. The gas price dropped 8.9%, which continued a multi-month downward trend. 

JD Power put the average American household’s gasoline bill at $200 monthly. The research firm reported, “Gas is the average US family’s second largest monthly expense.” An annual figure of $2,400. A household with an income of $50,000 could easily spend 6% to 7% of that income on transportation by car.

While the cost of living for most Americans has come down over the last year, discretionary income can still be crippled by interest rates, which have soared because of the Federal Reserve’s battle against inflation. Credit card debt, car loans, and mortgages have become more expensive for many Americans. Gas prices are among the few points of relief. 

What happens to gas prices for the balance of the year is primarily a guess about geopolitical and military activity. The danger to large commercial ships transiting the Red Sea toward the Suez Canal has not affected oil prices yet. About 2.8 million barrels go through the canal most days. That flow has not been substantially interrupted by attacks on ships by Yemen’s Houthi militants. And, even with that risk, abundant supply, particularly from the US, has kept a cap on oil prices. If the attacks sharply curtail ship traffic, that will change. 

$3 gas was unimaginable in mid-2022. If it remains below this level, American consumer discretionary spending, about two-thirds of GDP, should stay high.

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