Home > XE Currency Blog > The decline in US gas prices is not about weakness, but about a shift in energy's secular trend

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By New_Deal_democrat November 15, 2013 9:58 am
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The decline in US gas prices is not about weakness, but about a shift in energy's secular trend

Earlier this week I wrote that gas prices were at a near 3 year low, appearing to validate the suggestion I meade two years ago,   that the Oil choke collar would begin to disengage this year.  Obviously, paying lower prices for   energy puts more money in consumers' pockets for other spending, and/or for increased saving.  The next day, Barry Ritholtz had a Bloomberg articles entitled http://www.bloomberg.com/news/2013-11-11/beware-of-falling-gas-prices-ritholtz-chart.html "Beware of falling gas prices," suggesting that lower gas prices may actually reflect a weakening economy.

 

While falling gas prices in some circumstances (e.g., late 2008) may indeed mean a weakening economy, in this case I am reasonably sure that is not the case.

 

Most importantly, gas prices are seasonal, and almost always fall between Labor Day and Thanksgiving. At some point between then and January, gas prices should bottom and begin to move up again.  So the fact that we are in the midst of a significant decline in gas prices during autumn, by itself, in no way signals weakness.

 

In order to gauge the true strength in gas prices, you have to do a YoY comparison.  Even there, the secular trend in prices can swamp the cyclical strength or weakness shown by prices. Gas prices rose rather consistently between early 1999 and mid 2008, but during that time the trend in GDP declined significantly under 3%, its previous trendline. In other words, the secular strong upward move in gas prices correlated (and almost certainly to some extent caused) with secular weakness in GDP.  And one could hardly say that the move from gas from under $# a gallon to $4.25 a gallon in late 2007 through midyear 2008 showed economic strength!  Here is a graph comparing the quarterly YoY percentage increase in gas prices with the YoY increase in real GDP:

 

While the relationship isn't perfect, in general increasing gas prices lead to decelerating if not outright declining real GDP, while decreasing gas prices correlate with a subsequent accele

 

As I have previously pointed out, with persistently high gas prices in a series of posts earlier this year:

 

http://bonddad.blogspot.com/2013/03/the-oil-choke-collar-loosens.html

 

http://bonddad.blogspot.com/2013/04/the-oil-choke-collar-loosens-hybrids.html

 

http://bonddad.blogspot.com/2013/04/the-oil-choke-collar-loosens.html

 

http://bonddad.blogspot.com/2013/04/the-oil-choke-collar-loosens-new.html

 

http://bonddad.blogspot.com/2013/04/the-oil-choke-collar-loosens-natural-gas.html

 

(1) exploration of new oil fields has increased substantially, (2) use of alternative fuels such as natural gas for truck fleets has increased dramatically, (3) rail traffic has grown preferentially over less efficient truck traffic, (3) commuter use of mass transit has increased, (4) gas efficiency of the American passenger vehicle fleet, and (5) due to Boomer retirements, and a higher unemployment rate, miles driven has decreased due to a smaller percentage of the population driving to and from work.

 

Since that time, it has been reported that the efficiency of America's vehicles has improved 20% from 20 mpg to 25 mpg just since 2007:ration or increas

 
 

The year 2012 appears to have been the tipping point where increased supply via exploration and alternative fuels and decreased demand due to efficiency savings, crossed.   As a result, for most of 2013, gas prices have been lower than they had been at equivalent times in 2012 or 2011.  One way to look at this is to show the seasonal rising and falling of gas prices over the last several years.  Notice that each winter into spring, the percentage increase in prices has been decreasing, while the decline from summer to winter has at very least been remaining the same, if not actually increasing:

There is no indication that YoY GDP has been any lower in 2013 to date than in 2012.  I see no reason (except for the effects of the October government shutdown) for that to be the case this quarter either.

 

So in this case I think we are seeing a decline in gas prices that is better correlated with economic strength, not economic weakness.

 
 

 

 

 
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