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January 2015

Fluctuating Gas Prices and the American Economy

There has been much fervor in the news lately over the steep decline in gas prices and the ripple effect that this will have for American industry and economy.

According to Jonathon Lansner at the Orange County Register, $1 of every $40 spent in California last year was spent on gas. Therefore, a change in the cost of oil represents a significant proportional change in how we spend our money on an individual basis.

Due to the advent of new methods of fossil fuel mining, America now gets its oil primarily from domestic sources. Thus, until domestic resources begin to drop off, gas prices will remain low. Many, including President Obama, have encouraged Americans to respond to this temporary price drop in an appropriate and responsible way: “Take ht money you’re saving, pay off the credit card or go get a new appliance, or buy a fuel-efficient car — so that when prices go back up, you’re still well-positioned” (President Obama as quoted in Seattle PI).

For manufacturers, particularly car manufacturers, the drop in oil prices necessitates adjustments in company habits and in product output. For all types of companies, the drop in prices will mean a temporary decrease in the cost of transporting materials. However, for companies that work in products directly related to gasoline (like cars), the picture becomes a bit more complicated. While in the recent past, emphasis in the automotive industry has been placed on fuel efficiency, trends in the coming years may instead concern appearance, drivability, and other less environmentally friendly features.

As Steve Goldstein points out in Market Watch, we will also need to observe how the drop in oil prices will carry over into other markets aside from transportation and food. As other products may become cheaper, and as the American average salary stretches further with less money allocated to gas, consumption may continue to go up, a pattern already suggested by this year’s Christmas spending increase.

As gas prices drop, so do taxes on gasoline, which suggests that there will be less money in coming years for public works, particularly for transportation projects. With a rapidly declining transportation infrastructure in California and all over the US, a renewed interest in travel by car my indicate a long-term setback for these kinds of important projects.

We may hope that, as President Obama suggests, Americans will take this opportunity to plan ahead and invest in long-term transportation solutions that are more environmentally friendly.