Oil prices have taken a tumble. Falling from $147 a barrel in July of 2008 to the mid-sixties in July of 2009, the cost of crude has been cut nearly in half. Consumers are feeling relief at the gas pump as the price per gallon of gasoline has come down from more than $4.00 from its peak to the $2.50 range today. While it might seem like this decline should come as good news for consumers, that's not necessarily the case.
Why Low Is Bad
Speculators aside, the price of oil and gasoline are driven by supply and demand. High unemployment in the United States has already caused significant changes in commuting patterns. The unemployed don't drive to work every day. Nor do they drive to the beach or the mountains or the amusement park every weekend. In fact, Americans drove 8.6 billion fewer miles in the first two months of 2009 than they did a year earlier, according to the Department of Transportation.
Sure, it's easier and faster for commuters to get to work in New York, Ohio and California, but along with that faster commute comes a catch. The unemployed don't buy new homes, new cars, new appliances or just about any of the other goods and services that those commuters and their employers are making and selling.
A few of the major downstream impacts include declining real estate values that hurt the whole neighborhood and stifled technological innovation as lower gas prices eliminate the incentive to buy fuel efficient cars and to invest in clean fuel technology. (Read Hybrids: Financial Friends Or Foes? for a look at the bottom of whether or not these vehicles fit your budget.)
The prices for oil and gasoline may seem low based on recent memory, but from an historical perspective, they may have room to fall. In January of 1999, oil traded at $16 per barrel. Gas started the year at $0.98 per gallon and closed at a whopping $1.35 according to the U.S. government's Energy Information Administration.
While the global demand for fuel, particularly from developing economies, is unlikely to let price return to those levels, the U.S.recession (pending jobless recovery) and possibility of a new era of frugality aren't likely to do much for demand in America. If the winter of 2009 comes in unusually warm and unemployment climbs slightly to hit double digits, the price of oil may continue to slide. (Check out How Does Crude Oil Affect Gas Prices? to find out how this commodity's fluctuating price affects more than just how much you pay at the pump.)
Investing in Commodities
Declining oil prices may be a sign of a bad economy, but that doesn't mean there aren't investment opportunities available for those who know where to look for them. Just as stock pickers can make money in both rising and falling markets, so can commodity investors.
Take a look at Become An Oil And Gas Futures Detective to find out how to stay on top of data reports that could cause volatility in these markets. Or peruse A Guide To Investing In Oil Markets for insight into how to take advantage of this market without having to open a futures account.
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