Gas Prices Take a Dip

Gas prices, here in my town, have hovered just over $4/gallon for months, hitting a high last month at around $4.09. It was actually quite surprising to see a gas price sign for $3.99/gallon last night. Though any relief is better than no relief, we're still paying over a dollar a gallon more than we were last year around this same time. What has caused gas prices to drop ever so slightly?

Dolly's threat temporarily pushed gas prices up.
Tropical Storm Dolly was initially feared to threaten oil production in the Gulf of Mexico. If production is disrupted, the principals of supply and demand come into effect and cause prices to go up. The possibility that Dolly would grow to become a hurricane and damage U.S. oil rigs in the gulf has been cause for some speculation, as investors helped push oil prices up.

Several oil companies have evacuated oil rigs in the gulf in preparation for the rough seas caused by the storm. Dolly has been gaining strength, but the storm is not believed to have a major impact on U.S. oil production. Now that most oil production companies seem to be out of harm's way, gas prices have been adjusted back down a bit.

The National Weather Service expects Dolly to reach hurricane strength as it hits land on the lower Texas coast on Wednesday morning, and advises all who live in the area to take steps to protect life and property. It's also been recommended to stock up on food, water, and supplies, to have a vehicle with a full tank of gas in case of the need to evacuate, and to have enough cash on hand in case ATMs and credit card machines don't work due to power outages.

The dollar has gained strength, lowering fuel prices.
Treasury Secretary Henry Paulson expressed confidence today that lawmakers will pass the bill to prop up Fannie Mae and Freddie Mac, the government-sponsored enterprises which buy or back the equivalent of about half of all U.S. mortgages. The dollar touched its lowest earlier this month, due to concerns that these mortgage giants may not survive the housing slump. Fannie and Freddie play a key role in the U.S. mortgage market. Paulson reiterated that a strong dollar is "really very important."

Also, the president of the Philadelphia Federal Reserve Bank, Charles Plosser, said that the central bank will probably need to raise interest rates "sooner rather than later." Raising interest rates works to help decrease the rate of inflation. When inflation is on the rise, one dollar is worth less than it used to be worth, and it simply costs more for consumers to buy the same things, such as gas or groceries.

The dollar's decline has played a major factor in the increased prices at the pump. When the dollar weakens, investors tend to buy commodities, such as gold and crude oil, to hedge against inflation. These speculators are part of the reason the average consumer feels the pain every time they fill up their vehicle. Investors tend to back out of commodities when the dollar gains strength, so the price of gas goes down.

American consumers have been consuming less fuel.
Actually, our cars have been consuming less fuel, since we've been forced to adjust our driving patterns to save money on gas. This past year's gas prices, in combination with a declining economy, has caused many drivers to cut back on unnecessary driving. Many have begun to carpool or take public transportation to work, take vacations closer to home, and just stay at home more.

With this change in driving habits, American fuel usage has dropped 3.3%, compared to the same time last year. This is a big change for the U.S., the country that uses far more fuel than any other country in the world. High prices can't be supported when there's less consumer demand for fuel, so prices have dropped to keep in step.



Sources:
newsyahoo.com
National Weather Service
moneymorning.com
bloomberg.com
money.cnn