Question came into me and I thought it was timely and makes a great point…so here goes.

• You are pretty negative about the economy, I get that I think. But gas has been getting cheaper for a while now where I live. Can you explain that?

Yup, sure can…demand. There is lower demand for gasoline lately, that is a proven fact.

For instance, this morning a report was released, it’s referenced the national gasoline stockpiles. That is essentially the amount of gasoline that is stored awaiting sale/transportation to gas stations. When that stockpile is stable at a certain volume then the price of gas at the pump stays relatively steady. If the stockpile shrinks that means there is a higher demand for gas or that the suppliers are not producing enough…the supply and demand thing…and that drives the price of gas up since gas is a commodity. If the stockpile increases then the price goes down…again, supply and demand.

This morning the report showed the stockpile once again grew…and grew by almost 300%…meaning 3 times more gas going into the stockpile than expected. So when you have far more supply, the price goes down. And no, the producers didn’t produce more gasoline during that period, the production/supply remained essentially the same.

The real question to ask isn’t really why the price of gas went down…it is why the stockpile is going up so drastically. Meaning, why the supply stayed the same from the producers but user demand plummeted? And the most significant part of that…plummeting user demand.

And now we get down to it…why is the demand for gasoline plummeting? And that answer I am sure you already have figured out. People buy less gas for two primary reasons; 1) they are driving less, 2) not enough money in their pocket to pay for the gas.

On the surface it appears that the two could be, or are, connected. I say, no…for the most part.

Remember that the job market is falling apart and there are less people working (workforce participation rate)…and that means fewer people needing to drive to work. Also, they have less money to spend since many have no paycheck…meaning fewer trips to stores or socializing.

But, I feel the overall primary reason is less money in people’s pockets. When you look at the real inflation figures we all know that prices of every day items (i.e. food, rent, interest, mortgages, utilities, etc.) are all going way up over the last 3 years. And that means less money in people’s pockets any way you want to look at it.

Now, a lot of people would celebrate gasoline prices coming down…I get that. And from a personal perspective it can be a really good thing. But, when viewed on the macro scale…when gas prices are down…and when supply is steady…that means the economy is doing worse for everyone as a whole.

And there is a secondary problem to all of this…when demand drops and the price drops…guess what producers do? Yup, they normally (i.e. almost always) reduce production. And guess what that does? Yup, reduces supply which raises the price at the pump if demand stays steady or increases. If supply drops and the demand goes up…then gasoline prices at the pump will soar.

We are in not just tough economic times…we are in complicated times…and it will get worse.

I hope this helped a bit.

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