$2 a Gallon: What It Means

Jim Motavalli

Jim Motavalli | Aug 25, 2015

We don’t have to speculate about the effects of $2 a gallon gasoline; it’s already here, say pump watchers in Tennessee, New Jersey and other states. You’d pay $1.95 at the Citgo pumps in Medford, NJ right now. We’re below $42 a barrel, and at the lowest price in six years.

The short-term outlook is for continued cheap gasoline. CNBC points out that gas prices always go down (by 35 to 65 cents per gallon) after what’s euphemistically called the “summer driving season.” And cheaper winter-grade gas comes online around the middle of next month—that shaves another 25 cents off the price of a gallon.

People tend to talk about gas prices in isolation, but in fact they occur while a whole lot of other stuff is going on—like the big blip in the stock market that just happened. Cheap gas prices spur economic activity, but they also depress oil-producing economies (including ours).

Obviously, continued low prices are not good news for EV sales on the eve of National Drive Electric Week, but they’ll be great for the SUV revival underway at the moment. Edmunds analyst Jessica Caldwell tells me:

Cheaper gas prices will continue to drive light truck sales. In fact, we are seeing light truck market share rise month after month. Cheap gas prices and cheap credit create a favorable car-buying scenario for the many people needing to buy a vehicle. That said, cheap gas isn't available everywhere—one of the nation's largest car-buying markets, Los Angeles, is seeing much higher prices (about $3.70) due to the state's oil refineries. 

I also asked Caldwell about Dow Jones’ crazy ride as an auto-buying wild card:

The stock market will make some people nervous but we will have to see how long this plays out. The new car market has a lot of momentum right now and consumers will be blitzed with end of summer/Labor Day/model-year close-out deal messaging which will probably win out over stock market woes. 

In other words, we’re still heading for a 17 million sales year in the U.S. But let’s think this through. Cheap gas means people drive more—what’s called Vehicle Miles Traveled (VMT) is trending upwards for the first time since the previous peak in 2007. If people drive more, it leads to more accidents, but it could also make them more aware that a greater share of their income is going to gas. Hence, they still buy SUVs but the model of choice is a 30-mpg car-based crossover. The market reflects that—crossovers are the hottest segment.

The low prices are also wreaking havoc on Middle Eastern countries like Kuwait and Saudi Arabia, which so far have refused to lower production to try and push prices back up. The Saudis have also been burning through foreign currency reserves to keep the economy humming--and they're also (like the addicted dope dealer) using too much of their own oil supply. These desert states are also the biggest buyers of top-end luxury cars from Ferrari, Maserati, Lamborghini—they buy the show cars right off the stand, and order lots of expensive custom extras. In 2012, Ferrari sold 556 cars in the region. Will those sales now take a tumble? Don’t stay up late worrying about it.

And don’t worry too much about EVs, either. Yes, $4 gas is a big reason to buy a car with a plug, and the payback period compared to a gas vehicle is shorter. But a new Harris Poll shows the same level of commitment to green for the next car as existed in 2013. Interest in battery EVs and plug-in hybrids has grown since then. Actual EV sales are holding steady.

Also consider this: We’re not going to stop using oil because we run out of it, or the price goes too high—we’ll stop because climate change gives us no other choice. Coal’s pretty cheap now, but we’re phasing out of it, spurred both by market forces and the Obama Clean Energy Plan.

Here's some analysis on why some states have lower gas prices than others right now:


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