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A Decrease in Gas Prices

And the Effect it Has on the Economy

Felicia Grant
Professor

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During the early 1990s, Americans didnt worry too much about how much money
theyd have to spend on gas to fill up their tanks. Whether you were going away for family
vacation or just driving to work, paying for gas wasnt much of an issue. In 1990, the average
economic price for gas was as low as $1.16 (http://www.1990sflashback.com); could gas prices
plummet that low once again? In 2013, the average gas price in America was $3.49
(http://www.eia.gov). A price of $3.49 for gas could be quite expensive for a middle-class family
or a single mother. Today, gas prices have plummeted and Americans arent wasting any time to
fill their gas tanks while the decrease lasts.
Although current gas prices may not be as low as they were during 1990, a few quarters
off of the price of $3.49 in 2013 is being greatly appreciated by motorist across the country.
Currently, the average price for gas in Florida is $2.94 and $2.70 in South Carolina which is the
lowest price recorded this year (http://www.gasbuddy.com). Low gas prices may be an exciting
thing to see or hear about for motorists, but can the decrease produce a negative effect on the
economy?
Marilyn Geewax, senior editor for National Public Radio (NPR), wrote an article
pertaining to the topic of low gas prices. According to the Labor Department, the Consumer
Price Index (CPI) has risen by 1.7% over the past 12 months; thats half of its average rate of
increase (http://www.npr.org). CPI is an index of the variation in prices paid by typical
consumers for retail goods and other items. While the news may be joyful music to consumers,
others fear for deflation. Deflation is a decrease in the general price level of goods and services.
Deflation occurs when the inflation rate falls below 0%.
The last recorded period of deflation occurred during the Great Depression in the 1930s.
Economists argue that if energy prices continue to fall, America could face a historical tragedy

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once again. During a deflation, business owners face hard times and they experience the most
losses. As the price of goods decrease, business owners also see a decrease in their personal
earnings.
This means that they may potentially lose workers and contractors. Making fewer
earnings would mean that workers could receive a decrease in their wages. Before realization, a
once wealthy business owner may have to battle a difficult choice of closing his/her business, or
face bankruptcy. From that point, an everlasting cycle begins. Several businesses and homes will
tactlessly lose value. Investments will no longer hold a value that holders never thought would
fall.
Unfortunately, America isnt the only country experiencing pressure. Both Europe and
China are facing premature economic growth. Because of deflation, trading could be placed on a
hiatus which would cause countries, including the US, to lose even more money. When
consumers and companies in other countries start cutting their purchases of energy and goods,
then global prices fall (http://www.npr.org). With so many examples of what may happen if the
CPI continues to fall, it makes one wonder if the economy will be able to stay leveled to prevent
such a tragedy.
Globally, several bankers, policymakers, and economists are researching tools and
working towards developing beneficial ways to prevent economic deflation. The United States
Federal Reserve has hopes of maintaining the 2% inflation rate. Business owners have no
intentions on raising wages for workers and the price of goods are now lower than ever. With the
excitement over low gas prices, many are blind to the deeper topic. Where will the economy
stand even after our gas tanks are full?

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Chris Farrell, editor for Bloomberg Businessweek, wrote an article on December 19,
2013 titled Deflation Is Coming, and It Doesn't Have to Be Bad. Farrell stated that deflation
was becoming a modern problem; completely ordinary and inevitable if, and only if, things that
needed to be done were done right and accordingly. He argued that the economy was leaning
towards deflation because of international competition for markets, immigration, and rapid
technological advances such as Amazon (Farrell Chris, http://businessweek.com).
Farrell continued by stating that during the 19th century (Great Depression), deflation was
a dominant price movement caused by an increase in international trade, technological
advancement, and massive migration. The economy is experiencing the same causes today that
were seen during the Great Depression. Although motorists and other consumers may not want to
see gas and merchandise prices rise again, doing so can benefit the economy in the long run.
Deflation should not be a topic taken lightly.
Chris Farrell argues that a plummeting spiral of debt deflation is ominous and could place
banking systems in debt and may even put a hold on global trading. Farrell also states that if the
deflation rate becomes dramatically high, interest rates will increase, and servicing debts could
be extremely difficult for borrowers. Each effect could cause a chain reaction and unfortunately
lead to widespread bankruptcies. While the topic of deflation may sound frightening, there stands
a positive form of deflation; a mild deflation.
A mild deflation can be caused by innovations that decrease costs and prices, while
opening doors and building opportunities for new markets and businesses. During the late 19th
century, good deflation was somewhat common. The wholesale price level fell about 1.5
percent annually from 1870 to 1900, yet living standards improved as real incomes rose 85

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percent, or about 5 percent a year (Farrell Chris, http://www.businessweek.com). Thanks to the


productivity-driven deflation, America was the worlds leading industrial power at that time.
In conclusion of the article, Farrell gave input on what he believed should be done in
order to prevent an era of deflation from occurring. He takes economics as a serious topic matter
and provides great advice for the Federal Reserve to take into action to save the economy.
The Fed will need to learn more about how to distinguish between deflations
reflecting a healthy economy and a fall in prices that threatens to set in motion
debt deflation. Thing is, the central bank cant manage that difficult task on its
own. Its critical that Congress remove an ingrained bias in the tax code
favoring debt financing and putting equity at a disadvantage. Farrell Chris,
Bloomberg Businessweek
This means that the Federal Reserve has to develop a tool or tools that would benefit them in
learning new ways to rebuild the economy and keep prices, wages, and taxes at a rate that would
protect the country in the long run.
What is at the core of low gas prices? Where did it all begin? According to Fox News, the
price for a barrel of oil has dropped from over $100 to $70. Due to the economys fracking
boom, the price of oil could stay low for a long period of time. Fracking is the process of
forcing rocks or other existing fixtures to open in order to extract oil or gas. Without the
fracking, oil would cost twice as much as it currently does (http://www.foxnews.com).
The Organization of the Petroleum Exporting Countries (OPEC) is a popular name in the
game of oil-producing throughout various nations. OPEC has amazingly been able to calibrate
the price of oil and gasoline. The organization has done so by increasing and decreasing supply
while having no hopes on cutting production. In a recent study, consumers have saved $63 to
$248 billion in 2013. Although thats a lot of money in consumers pockets, thats less money in
the economy as a whole. According to the article, the oil industry is credited with developing

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nearly 2 million jobs with that number suspected to double by the year 2035
(http://www.foxnews.com).
The price of Crude oil has dropped to 40% which is the lowest rate since 2010. The
International Energy Agency (IEA) fears that a rate that low could influence a transition to
renewable energy (Maria van der Hoeven, IEA exec. director). IEA believes that oil prices could
continue to fall drastically in the upcoming year.
Due to the price drops, the market has entered a market where Chinese economic growth
has reached a low point and U.S. shale output has expanded (in.reuters.com). Van der Hoeven
argues that leaders should apply a tax on carbon emissions or cut incentives for hydrocarbon
production. Doing so could be extremely beneficial because the collapse in oil prices provides a
stimulus for consumers globally (in.reuters.com).
A plethora of articles provide information stating that gas prices could reach rates well
below $2 by 2015. According to CNN, states such as Oklahoma and Texas are currently
providing gas at $2 per gallon. With low gas prices being provided to motorists, the price of oil is
also declining quickly. At a price of less than $65 per barrel, oil is at a 5-year low. Analysts
believe that the cost could decrease to $35 by the upcoming year. Analyst Morgan Stanley stated
that next year's full-year average for the cost of a barrel of oil could be as low as $53
(money.cnn.com).
As the price of oil per barrel plummets, so will the national average cost of wholesale
gas. The current average price of gas stands at $2.67 but economists believe that it could reach
$2 before anyone knows it. if the national average actually does hit $2, that means most

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stations in the U.S. are selling gas for well below that, since that price is always inflated by a
handful of high cost stations (money.cnn.com).
In the article Gas: $2 and Still Falling, CNN senior editor Chris Isidore states factors
that he believes has influenced a barrel of oil and wholesale gas prices to fall. These factors
include an increase in U.S. oil production, OPEC's decision not to cut production, weak demand
due to an economic slowdown in Europe and Asia, and an increase in the production of fuel
efficient vehicles. Another influence in low gas prices could be in the act of investors abandoning
the oil business.
A decrease in gas prices influences a need for a higher tax on gas; one that wouldnt pose
a threat to motorists living with a lower middle-class lifestyle. With a belief that gas prices will
reach rates under $2, a higher tax rate is likely to be taken into effect. The current tax rate on gas
stands at 18.4 cents and it has withheld that rate since 1993. The Tax Foundation has reported
that due to inflation, the rate on gas tax has been reduced by one third of its original rate
(http://www.time.com).
According to Tax Foundation economist Joseph Henchman, gas taxes cover less than half
of state and local transportation spending at both local and state levels. To name a few,
Pennsylvania, Wyoming, and West Virginia have each received an increase on their gas tax.
Iowa, Utah, Michigan, New Jersey, and Oregon are in discussion to receive a tax raise as well.
While most Republicans are in favor of expanding the raise on gas tax to other states, President
Obama doesnt wish to consider it. A tax hike would have perhaps been a more popular topic of
discussion at the time while gas prices were between $3.50 and $3.75 per gallon (Brad Tuttle,
TIME).

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Data

The above chart shows the varying average prices of wholesale gas (regular) for this year
and the previous year in the U.S. As documented, the price of wholesale gas remained at a
typically high rate during the year of 2013, with the highest cost being about $3.80 per gallon.
The lowest average price for wholesale gas during 2013 was approximately $3.20 per gallon
(Gas Budddy).
Prices did not began to drop drastically until mid-July of 2014. During the late weeks in
July, prices dropped from $3.68 per gallon, to about $2.88 in November. Thats a drop of 80
cents in only 4 months. Currently, the price of wholesale gas in the U.S. is about $2.65 per
gallon, as rates are continuing to decrease. In no time, gas prices are sure to reach a rate of $2 per
gallon by early 2015. If a tax isnt applied of a more drastic changed isnt put into action to

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benefit the economy, gas prices will continue to fall. Lower gas prices could potentially reduce
oil supply, raising demand, causing chaos.
In conclusion, although a decrease in gas prices will be beneficial to motorist, the
economy can fall along with the rate and prices; in other words, low gas prices isnt an event that
would cause a completely a positive effect. Plummeting gas prices produces a threat that would
lead to deflation. While there are positive forms of deflation, an everlasting deflation can easily
occur, leading to a form of global disaster not seen since the Great Depression.
Several economists, analysts, and leaders agree that the drop in gas prices has been
caused by a global competition for owning markets, immigration expanding, and rapid scientific
and technological advances. Scientific advances include energy efficient compact cars including
those that do not require gas. Another factor that influences low prices for wholesale gas is the
price of a barrel of oil. With various causes of the decrease in wholesale gas prices, one must
determine a way to make one change that would influence other changes naturally.
One act that can be beneficial to the economy would be a raise being placed on the tax of
wholesale gas prices. If there were to be a raise placed on the tax, it would be a raise that can
benefit the economy, bringing in much needed currency. The tax would not negatively affect
wholesale gas consumers. Instead, the tax would be raised to a rate small enough to be
overlooked by motorist, but great enough to support the economy in the long run.

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