$2.79 — and dropping?

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This past summer I wasn’t thinking to ever see gas prices below $3.00 a gallon, and now gas is 21 cents below that price. I am sure that a lot of people are seeing this as a good sign — lower gas prices. But that isn’t the vibe I get from them. Sure, lower prices help when we fuel up each week, but the why of the lower gas prices, that is what is really important.

Some might suggest that an election is close, and that lower prices could help certain people, say those in power. I don’t disagree with the second part of that sentence, but the inferred idea that those people might be manipulating the prices, that I do disagree with. The sort of forces that move the prices of goods are not that easily manipulated (I am an Adam Smith school of economics type of guy).

No, if prices are going down, something related to supply and demand has to be going on.

Supply: Shale and other gas extraction methods in the US have made significant increases in our domestic supplies.  Increased supply should bring prices down.

Demand: Here we need to think world-wide. Economic engine in Europe seems to be stalling out. Even Germany, that has been keeping Europe running, appears poised to slow or stall.  And the petroleum futures market is uncertain about Europe, driving prices down.

Supply: Saudi Arabia. Usually Saudi Arabia is the world’s price regulator. Not being as dependent hand to mouth for their oil revenue, they will pump more to lower prices, and pump less to keep prices up.  Only they aren’t pumping less. They are pumping more, attempting to keep their revenues up. Which lowers prices, and causes them to need to pump more to keep revenues up.

So, from what I am seeing, these lower prices have one good cause — the increase in domestic production, and two bad causes — economic stagnation and Saudi oversupply. So, based on this logic, lower prices, caused by economic stagnation, might be used by people who contributed to the stagnation by their misunderstanding of economics to claim they are making the economy better and thus get themselves voted into office to continue the policies they instituted that helped fuel the stagnation.

So, how much lower will the prices go, and will it be for a good or a bad reason, or combination of both?

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