Even still, there’s optimism that gas prices will drop even further. Price is determined with basic economics – the demand for gasoline is relatively stable, but the supply is increasing. US output alone has increased 70% since 2008.
What will these lower prices mean for the American economy?
For starters, gas prices typically decline in the fall but this year the fall has been exceptional. Last year’s average was around $3.50 per gallon, meaning the drop below $3.00 will save the typical American household around $50 a month. Shippers, airlines and delivery companies will enjoy boosted profits from the lower fuel costs. Retailers are hopeful that the savings at the pump will translate into increased spending as we near the holiday season. (This is something to think about if you’re investing in these stores!)
Due to the drop in oil prices, falling 25% since mid-June, savings for winter heat could total hundreds of dollars, especially in the northeast. This gives the average American household much more breathing room. According to Bank of America Merrill Lynch, families with income below $50,000 spent 21.4% of their income on energy.
In a nutshell, a drop in energy prices adds spending power to the consumer. However, consumers should be cautious with where they spend their dollars. People have a tendency to perform “mental accounting”, or subconsciously compartmentalizing spending into categories. If one usually spends $50 per fill-up and now only pays $40, he/she will place the extra $10 into a “discretionary” income category rather than save it.
Although Personal Finance Genius is definitely biased towards saving money, any savings at the pump should be placed promptly into a savings account.