Drop in gas prices provides consumers a glint of good news

By Sandy Shore
Associated Press / August 10, 2011

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DENVER - Gasoline cost nearly $4 a gallon this spring. Now it’s inching closer to $3.

That is giving worried families some relief and easing one of the biggest drags on the economy.

Gasoline has fallen to $3.65 a gallon, down 30 cents from early May. In Massachusetts, the average was $3.74. If the national average drops to $3.35 next month, as some experts predict, the typical driver will be paying $33 less a month less than in the spring.

Maybe that’s enough for only a couple of Big Macs a week or an extra trip to Wal-Mart, but it’s a psychological boost for consumers.

“It’s not the saving of the economy but it definitely will put a smile on a few consumers’ faces,’’ says Michael Lynch, president of Strategic Energy & Economic Research.

Gasoline prices track oil, which has fallen more than $30 to just under $80 per barrel over the same period. Gasoline usually lags behind a drop in oil prices by a few weeks as refiners buy the crude, change it into fuels, and ship it to gas stations.

Most of crude’s drop has come in the last two weeks as the United States lost its top credit rating and reports showed economic growth stalling. Analysts say oil’s decline could translate to a drop in pump prices of a quarter within two weeks and as much as 30 cents within a month. The typical driver uses 50 gallons of gas a month.

Rusty Edwards, an assistant manager at a retail cellphone shop in St. Louis, says the drop at the pump is like getting a small raise at work. It typically costs Edwards, 35, about $60 to fill up his truck. Yesterday morning, it cost $47.

“It just makes me feel that hopefully, things are getting closer back to the way they were,’’ when gas cost around $3 a gallon, he says. That was in February.

Still, Edwards says he doesn’t feel confident spending freely. He needs more customers in his store. “People aren’t spending what they used to,’’ he says.

A drop in oil prices helps the economy because oil is used in so many products - gasoline, jet fuel, diesel, which is the primary fuel for transporting consumer goods to stores, and even some products that use chemicals.

Airline passengers could see lower fares by this fall, says Basili Alukos, an analyst for Morningstar. For airlines, jet fuel is more than one-third of their costs.

As a rough estimate, a $10 drop in oil prices could increase economic growth by 0.2 to 0.3 percentage points. The economy grew at an annual pace of just 0.8 percent in the first half of 2011, its slowest since the end of the recession, as manufacturing and consumer spending dramatically slowed.

Even with lower gas prices, the overriding concern will remain the economy. “I think there was a loss of confidence in the last 30 to 45 days, a loss of optimism,’’ says Fred Rozell, retail pricing director at Oil Price Information Service.

That’s important, especially among consumers, who drive the US economy.

Julie Suazo, 34, who lives in the Denver suburb of Federal Heights, says gas prices have put a big dent in her family’s budget. A price break “is something,’’ but finances will probably still be tight for Suazo, her husband, and their six children. She paid about $52 yesterday to put 17 gallons in her minivan.

Rozell expects the price of gasoline to hover in a range around $3.30 per gallon and then drop later in the fall.