Gas Prices Are Falling, But Are They Falling Too Fast? Whether to Worry or Celebrate

Mohit Oberoi, CFA - Author
By

Jul. 13 2022, Published 12:31 p.m. ET

Average gas prices in the U.S. crossed $5 per gallon in June and hit their all-time high. However, prices have slumped over the last couple of weeks and are down sharply from their peak. The fall in gas prices is as fast as the rise. Should you celebrate the fall in gas prices or is it a matter of concern?

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Gas prices are high in most countries globally. Consumers across the world have been complaining about high gas prices and there have been protests in some countries. Policymakers have been worried about high oil and gas prices, as it is fueling inflation and raising recession fears. So, gas prices falling too fast should ideally be a matter of jubilation.

A media report expressed concern about gas prices falling too fast.

In its show America Reports, which aired on July 12, Fox News anchor Sandra Smith pointed out that the steep fall in gas prices is certainly not good news for small gas station owners. She pointed to a story from the WSJ that talked about how volatile gas prices are making life tougher for mom-and-pop gas station owners.

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While Smith expressed concern about rapidly falling gas prices taking a toll on profit margins for smaller station owners, her colleague and co-anchor John Roberts frowned that gas prices are “still a long way from $3.55 a gallon.”

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Are falling gas prices a cause of worry?

There indeed is merit in the WSJ report and Smith’s contention that volatile pricing, whether for gas or any other products, can create havoc for those retailing them.

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Another aspect worth considering here is the reason behind the steep drop in gas prices. Gas prices spiked in 2022 after Russia’s invasion of Ukraine raised fears of a shortage of oil. Higher oil prices eventually led to an increase in gas prices.

Crude oil prices have fallen below $100 per barrel.

Crude oil prices have fallen sharply and are now trading below $100 per barrel. However, the fall in oil prices is not driven by improving supplies but by demand concerns. Global recession fears have been rising, and so are concerns over oil demand.

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Simply put, oil prices dropping below $100 per barrel is a sign that markets are getting worried about a recession. While oil prices falling on easing supplies or de-escalation in the Russia-Ukraine crisis would have been a clear positive, the recent slump is being driven by demand concerns.

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President Joe Biden will be in Saudi Arabia this week.

President Joe Biden is headed to Saudi Arabia this week in his maiden visit to the Middle East as the U.S. President. The visit assumes significance as Saudi Arabia has so far ignored Biden’s call for increased production but is adhering to the previously announced production plan. While no wonders are expected from Biden’s visit, markets would watch any commentary on energy markets during the visit.

Many on social media have been mentioning that the recent fall in gas prices is not because of Biden’s policy. Going by that logic, the rise in gas prices wasn’t entirely due to Biden’s policies, either.

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