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Why do Gas Prices Go Down When the Economy is Bad?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 02 December 2016
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While it is true that the price of gasoline and other petroleum products does not automatically drop during a recession or period of depression, the condition of the economy often does have an impact on gas prices. When a bad economy does make gas prices go down, there are a few factors that often combine to create the situation. Here are some examples of what may lead to a change in the price of gas during an economic downturn.

At the core of any period where gas prices decrease is the issue of supply and demand. When the economy begins to impact the ability of people to pay for gasoline, they often turn to using public transportation rather than driving a personal vehicle. Some people begin to use alternative forms of transportation in order to minimize gasoline usage, such as riding a motorcycle. Others may turn to bicycles for short commutes, totally eliminating the need to use gasoline for transportation purposes.

As the demand for gasoline begins to shrink, producers make adjustments in order to deal with the diminished market. This may involve cutting back on production as a means of preventing a glut of product on the market. However, if demand falls substantially, suppliers may choose to cut profits in order to move product. This means that gas prices go down to a level where people can reasonably afford to purchase gasoline once again.

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Governments may also step in to regulate gasoline prices as a means of stimulating a distressed economy. By creating a situation in which gas prices decrease, consumer confidence is sometimes partially restored and people begin to use disposable income to make more purchases of goods and services of all types. In theory, this stimulates production in many industries and may help to ease difficult economic conditions.

However, the relationship between the economy and gas prices is not the same in every economic downturn. Depending on the nature of the economic issues, gas consumption may not be the first cut back that consumers make. It is usually only when gas prices have inflated significantly in a short period of time that consumers tend to rearrange their lives in order to divert funds normally spent purchasing gasoline to other obligations. Only when inflated gas prices go down to acceptable levels do consumers take a second look.

A number of situations develop when gas prices decrease. Industries that are associated with the production of petroleum products may find it necessary to partially curtail operations. This means laying off personnel, many of whom then require assistance in order to afford such basics as food, clothing, and shelter. Secondary businesses that sell gasoline become less profitable, especially those that depend on gasoline sales for a bulk of their profit. At the same time, transportation costs decrease, making it possible to ship goods to stores that in turn can afford to sell the goods at more competitive pricing. Thus, one sector of the economy is helped when gas prices go down while others encounter difficult circumstances.

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SarahGen
Post 3

@ddljohn-- Of course OPEC has the biggest role when it comes to gas prices. But I think we're talking about gas prices during a national economic crisis, not a global one. If OPEC put out very little petroleum, global gas prices indeed would be very high.

I think one factor that wasn't mentioned in the article is drilling. When gas prices are high and people buy less gas, more petroleum might be produced nationally to reduce cost.

The other side of this argument is that gas prices don't go down when the economy is bad because gas is one of the last things Americans give up on. They don't stop buying gas unless they're in a very bad economic situation. I think this is a good point. It would explain why there were high gas prices in 2012 despite the economy not doing too well.

ddljohn
Post 2

What's the role of OPEC (Organization of Petroleum Exporting Countries) in all of this? Doesn't OPEC ultimately set future gas prices when it decides how much petroleum to put out on the market? How does this affect gas prices in the US during a recession?

ZipLine
Post 1

I don't think that everyone stops driving when gas prices go up. In my town, if there is a prediction that gas prices will go up, people stock up on gas before that happens. This actually works well because when demand suddenly falls, gas companies get scared and reduce the price. The consumers really do make the calls in the American economy, at least I think so.

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