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.)

Still Sliding?
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.

Follow us on Twitter

Related Articles
  1. Investing Basics

    Explaining Options Contracts

    Options contracts grant the owner the right to buy or sell shares of a security in the future at a given price.
  2. Home & Auto

    When Are Rent-to-Own Homes a Good Idea?

    Lease now and pay later can work – for a select few.
  3. Fundamental Analysis

    Is India the Next Emerging Markets Superstar?

    With a shift towards manufacturing and services, India could be the next emerging market superstar. Here, we provide a detailed breakdown of its GDP.
  4. Investing

    Can a Venezuela Revolt Impact Oil Prices?

    How a social crisis in Venezuela could affect West Texas Intermediate crude oil and Brent crude oil prices.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares US Oil&Gas Explor&Prodtn

    Learn about the iShares U.S. Oil & Gas Exploration & Production ETF, which provides an efficient way to invest in the exploration and production sector.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI South Africa

    Learn more about the iShares MSCI South Africa fund, which is an NYSE-listed exchange-traded fund offered and managed by BlackRock.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI EAFE Small-Cap

    Read an in-depth analysis of the iShares MSCI EAFE Small-Cap Fund, a well-managed exchange-traded fund that tracks small-cap international stocks.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Global ex-US Real Estate

    Take an in-depth look at the Vanguard Global ex-U.S. Real Estate ETF, an international property fund tilted toward Asian markets.
  9. Stock Analysis

    The 4 Worst Oil and Gas Stocks of 2015

    Learn about the energy sector and the type of companies that operate within the sector. Find out about the four worst performing oil and gas stocks of 2015.
  10. Chart Advisor

    Traders Step Back to Assess Commodities Damage

    Traders are turning to these exchange-traded notes and exchange-traded funds to analyze key commodities and determine what could be coming next.
RELATED TERMS
  1. Principal-Agent Problem

    The principal-agent problem develops when a principal creates ...
  2. Derivative

    A security with a price that is dependent upon or derived from ...
  3. Security

    A financial instrument that represents an ownership position ...
  4. Brazil, Russia, India And China ...

    An acronym for the economies of Brazil, Russia, India and China ...
  5. Series 6

    A securities license entitling the holder to register as a limited ...
  6. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
RELATED FAQS
  1. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  2. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  3. How much oil must be produced to maintain inventory levels in the United States?

    Domestic energy investors should track the reserve inventory of crude oil for the United States, which is released in a weekly ... Read Full Answer >>
  4. To what extent is the oil and gas sector dominated by a few major companies?

    Oil and gas are two expansive and highly diverse product lines, with active competition domestically and internationally. ... Read Full Answer >>
  5. Do negative externalities affect financial markets?

    In economics, a negative externality happens when a decision maker does not pay all the costs for his actions. Economists ... Read Full Answer >>
  6. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!