$2 a gallon gasoline may be back by New Year

Source: By Donnelle Eller, The Des Moines Register • Posted: Monday, August 3, 2015

DES MOINES — Drivers are paying nearly 70 cents less for gas than they were a year ago, and the price at the pump is expected to begin dropping again this fall.

Prices could tumble close to $2 per gallon by the New Year, analysts said.

Patrick DeHaan, a senior petroleum analyst at GasBuddy.com, points to possible easing of sanctions against Iran under a proposed nuclear deal and a slowing Chinese economy for growing global oil supplies.

In Iowa, that could lead to gas prices inching closer to $2 by Halloween, with the statewide average under $2 a gallon by 2016, he said.

In January 2014, Iowa’s statewide average fell below $2, but it was short-lived. DeHaan sees lower prices staying around awhile.

“At the beginning of the year, I think the U.S. will be in a new era of low gas prices for the next couple of years,” he said.

So far, the U.S. average gas price has fallen further than Iowa’s average. DeHaan said refineries serving Midwestern states have experienced mechanical problems and delays returning online.

Morgan Stanley Chief U.S. Economist Ellen Zentner discusses why lower gas prices are here to stay. Bloomberg

The U.S. average was $2.69 a gallon this week, compared with $2.73 in Iowa, data from the Iowa Department of Agriculture shows.

But DeHaan and others say that price difference likely will disappear, which is good news for Iowa and the economy.

Iowans have already saved about $530 over the past year with falling gas prices, said David Swenson, an Iowa State University economist.

“You really can’t dodge gasoline costs … any relief we see is like a little mini-pay raise,” he said.

And money that doesn’t go into the gas tank gets spent elsewhere — at stores, restaurants and movie theaters, he said.

“It’s a night out — dinner and a movie,” Swenson said. “It opens up consumption opportunities in other parts of the economy.”

Boon for small business

More money in consumers’ pockets helps small businesses such as Boesen the Florist, owner Tom Boesen said.

“If you’ve got $15 more in your pocket after filling your car, you’re going to spend it somewhere else,” he said.

“We see it all the time. If gas prices go to $3.50, $4 a gallon, people aren’t going to go out,” he added. “They still have to drive. They’re going to cut something.

“But if prices go down, they’re going to treat themselves a little bit.”

Boesen also is beginning to see lower transportation costs — both to get fresh flowers into his stores and to send arrangements back out.

His family-owned business pays to have fresh flowers driven on air-conditioned trucks to Des Moines from Florida and California. Then the company drives many of those flowers back out — four trucks every day that zip around the metro area from six locations.

“If prices are almost a buck less than a year ago, that’s a pretty good day at the office,” said Boesen, who recently filled up his gas tank for about $2.50 a gallon.

That is about the lowest price in the Des Moines metro, according to GasBuddy.com.

Iowa’s diesel prices also have tumbled from a year earlier, falling $1.10 a gallon to $2.60, state ag data shows.

Predictions that prices might drop further would help boost profits, Boesen said. The company decided against raising delivery costs when prices climbed a year ago.

“If prices go lower, we’ll do a happy dance,” he said.

Lower prices raise optimism

Gas prices, along with food costs, play a big role in consumer confidence, Swenson, the ISU economist, said.

“We make those purchases weekly, sometimes daily,” he said, “and they can make us feel optimistic or pessimistic” about the economy.

The savings consumers see at the pump or in the grocery store aisle might not be enough persuade them to buy a new speed boat or Winnebago.

But it could influence the kind of cars and trucks they buy, Swenson said.

If Americans feel gas prices will be $3 or lower, they’re more inclined to buy bigger, less fuel-efficient vehicles, he said. Concerns that gas prices might push up and over $5 a gallon have the opposite impact.

Harold Hommes, an analyst with the Iowa Department of Agriculture, said the statewide average could fall as much as 50 cents by year’s end.

That would bring prices down around $2.25 a gallon.

“I think prices will remain stubbornly high for the duration of the summer, but then we could see a 40- to 50-cent retraction from where we’re at today,” Hommes said.

“It might not make the $2 mark, but there should be a significant retreat in prices,” he said. “The market is telling us that retail prices are going south real soon.”