UB Finance professor: don’t get too excited about falling gas prices

Many of us will be traveling to spend time and share special moments with friends and family this holiday season. While this year we’ll be experiencing less pain at the pump to go on our holiday travels, a professor in the Merrick School of Business says we shouldn’t be getting too excited about the drop in oil and gas prices.

In the Oct. 20 edition of The Baltimore Sun, Professor of Finance Steve Isberg said that while the decrease in gas prices is good for consumers, costs for other products such as food have continued to rise while salaries continue to remain mostly flat.

“I love it when I can fill up my tank for $60 instead of $75, but I don’t know if I’m going to jump for joy,” Isberg told The Sun. As of Nov. 14, the average price for regular unleaded in the greater Baltimore area was $2.88 a gallon, slightly lower than the Maryland state average of $2.90. That was down nearly 27 cents from a month earlier, and down 32 cents from a year earlier. Isberg says the current decrease in gas prices both in Maryland and across the country is part of a cyclical pattern.

“They’ve been ranging from a high of about $3.70 a gallon, and they’ve dropped to about $3.10 a gallon,” Isberg said while describing a line graph showing weekly average retail gas prices in the U.S. between mid- October 2012 and mid-September of this year. “They’ve been behaving within that range for the last two years.” In the chart, gas prices fell into the $3.10s in November of last year, and then went up over $3.60 a gallon during this spring and early summer before starting their current downward trend in July.”

“There are seasonal patterns. It’s usually high in the summer months, so if you take a look at any of the summer months, you’ll see that the gasoline prices are reasonably high,” Isberg said, referring to line graphs that showed average weekly gas prices over the last four, 14 and 24 years. “So, here again, reasonably high in the summer of 2014, and they typically do come down in the fall. So the fact that they’ve come down in the fall isn’t very much to get too excited about in and of itself.”

In the fall, oil refineries switch blends and start producing what’s known as the “winter blend” of gasoline, which is cheaper than the blend that’s produced for the summer. Isberg said that those seasonal patterns still showed themselves over the long-term, even as gas prices started rising through the 2000s.

“You can see that in the ’90s, from ’91 until about 2000, the prices are fairly stable, and varied within a very narrow range,” Isberg said.

The graph showed prices that were generally between $1 and $1.30 a gallon, and even dipping below a dollar a gallon in early 1999. Isberg said there was an increase in gas prices in 2000 and 2001 up to between $1.40 and $1.70, but then dropped back to just over $1 a gallon, and stabilized there. Then gas prices began trending upward.

“And then they steadily rose throughout that period from about 2002 to 2007 or so,” Isberg said. “You can still see the seasonal patterns, but you had a steady increase, and then when the bottom dropped out of the credit markets, at the same time the bottom dropped out of the commodity markets as well, particularly oil.”

In January 2008, gas was averaging over $4 a gallon; a year later, in the midst of the recession, gas had fallen to around $1.60 a gallon. Isberg says gas prices have been fairly stable since 2011, outside of the seasonal highs and lows.

“Usually you get a little spike up in the spring and again in the summer, so it very well could be that you see this turn back up,” Isberg said.

Refineries usually shut down during the spring for maintenance, and then prepare to make the switch to start producing the summer blend, which leads to gas prices rising annually during the spring and into the summer travel season.

“What would really excite me would be if we started to see this long-term trend start to decline, so if we continue to see these prices fall, and then get down into the low $2 range, which is where they were after the market dropped, and the $1.50 range where they were right around the turn of the (21st) century, that would be something to be a little bit more excited about,” Isberg said.

Crude oil prices have fallen from around $103 a barrel in late June to between $75 and $80 a barrel five months later. However, while the overall Consumer Price Index (CPI) annual inflation rate is at 2.36 percent since the beginning of 2000, with CPIs for transportation, housing and food also sitting between two and three percent, the CPI inflation rate for fuel stands at 5.31 percent, nearly double the 2.95 percent inflation rate for rental housing. The CPI with food and energy has gone up by nearly 40 percent since the beginning of 2000. Even without food and energy, the CPI has still gone up by more than 25 percent during that same time.

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