Gas prices may inch down — but that’s not all good news

New York
CNN Business

Editor’s note: This story is part of CNN Business’ Nightcap newsletter. To receive it in your inbox, subscribe for free, here.

There is good news and bad news on the gasoline price front. Good news: some price relief may be on the way. The bad news: it’s because traders are betting on a recession.

Simply put, there are two ways to lower prices: increase supply or reduce demand. The first is expensive and complicated. The latter occurs when consumers begin to withdraw because prices have risen too much and individual budgets are stretched. That’s what appears to have happened this spring, as Americans watched gas prices soar above $5 a gallon and headline inflation hit four-decade highs.

While that could mean relief at the fuel pump, it could also signal another kind of economic pain on the horizon.

“This morning’s market action has recession worries written all over it,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group. He put the odds of a recession this year at 99% because “nothing is 100%.”

Oil prices hit $122.11 on June 8, their highest since March and about a dollar lower than their highest since 2008.

In just two weeks since that peak, oil prices have fallen 16%. Why? It’s inflation, again, and the Federal Reserve’s campaign to fight it.

Consumer confidence has plunged to a record low as consumers grow increasingly frustrated with high prices, according to a closely watched survey released on June 10.

On the same day, the government’s main inflation gauge, the consumer price index, saw its biggest jump in 40 years, with prices jumping 8.6% for the 12 months to May. That was higher than the April reading – not the direction anyone was hoping for.

This mix of bad news more or less guaranteed that the Federal Reserve would have to raise interest rates more aggressively than it had previously signaled – a reality that has rattled investors and sent stock markets tumbling.

When central banks raise interest rates, it slows down economic activity, reduces demand for energy, which lowers gasoline prices (albeit slowly).

Over the weekend, US drivers got a very slight price break as the AAA average for a gallon of unleaded gasoline fell just below the $5 mark after hitting a high of 5, 02 dollars per gallon last week. That price has gone down by a fraction of a penny every day since then.

On Wednesday, oil prices continued to fall even after the Biden administration said it would urge lawmakers to suspend the federal gasoline tax of 18.4 cents per gallon in an effort to lower prices – a action you expect would be bullish for demand.

Brent crude, the international benchmark, fell 4% to nearly $109 a barrel on Wednesday. West Texas Intermediate crude, the US standard, fell 4.5% to $104 a barrel.

Gasoline prices fell much more slowly than they rose, reaffirming the adage that prices rise like a rocket and fall like a feather. For the two months leading up to last week’s record, the AAA average price rose 58 times in 60 days, adding 94 cents to the national average price. That’s a steady rise of almost 2 cents a day, compared to less than a penny a day that the price has fallen since Tuesday.

— Chris Isidore of CNN Business contributed to this article.

Do you like the nightcap? Register and you’ll get all of this, plus other fun internet stuff we’ve loved, delivered to your inbox every night. (OK, most nights – we believe in a four-day week here.)


Leave a Comment