What Falling Gasoline Prices Tell Us?

The Real Estate Espresso Podcast

What Falling Gasoline Prices Tell Us?

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What Falling Gasoline Prices Tell Us?

Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce.

On today’s show we’re talking about something that’s happened in the macro economy that’s not getting much attention. But first, I’d like to invite you to a live demonstration of our new custom language model, which we’re affectionately calling Victor AI. This is our own custom language model built on top of ChatGPT. We trained Victor AI with the contents of the Real Estate Espresso Podcast and my book, Magnetic Capital. It’s the difference between going to a family doctor versus going to a specialist. The specialist is always going to give you a more detailed and more precise answer.

Click on the link in the show notes and we’ll talk to you on December 16th, 2 p.m. We’d love to interact with you and interact with Victor AI.

On today’s show we’re talking about something that has happened in the macro economy that’s not getting much attention. Now, you’ve probably noticed that prices at the gasoline pump have been falling. That’s usually welcome news for consumers. Politicians will probably be quick to take credit for this.

Prices in the oil futures market are set by a combination of supply and demand. The futures price for crude oil is what gets the most attention, and today the WTI intermediate price for January delivery is at $57.44 a barrel, compared with over $72 at the start of this year.

There’s also a spot price for refined gasoline, and that wholesale gasoline price eliminates the delay between the pumping of oil out of the ground and refining oil into finished products, which are then placed in storage and later delivered to local storage and then finally sold to the gas station in your neighborhood.

As of the close of business on December 12th, the price was approximately $1.75 a gallon for that wholesale spot price. It’s important to note the wholesale spot price varies by region in the US. That’s a result of differing refining costs, differing distribution and environmental specs. For example, in New York Harbor it’s pricing today at $1.75 a gallon. On the Gulf Coast it’s $1.65 a gallon, and in Los Angeles $1.72.

Now the difference between the spot price and the retail price that you see at the pump, currently around $2.92 per gallon nationally, includes the federal and state taxes, as well as distribution costs, marketing and the profit for the retailer. Earlier this year the spot price was around $2.45 in the wholesale market and, of course, well over $3.50 at the pump.

The falling price is again influenced by two main variables: supply and demand. The supply side of the equation has hardly changed at all since the start of the year. Now, Saudi Arabia has added about a million barrels a day of oil to global supply, which is currently running around 10.7 million a day. The US supply has been running around 20 million barrels a day for most of this year. Fracking costs are pretty constant; there is no incentive for the producers to drop their prices.

The US is not self-sufficient, despite claims to the contrary. Most of the oil production in the US is a light sweet crude, which must be combined with a heavy oil, like a Saudi crude or a Canadian or Venezuelan or Iranian or Russian. About 80 percent of the heavy crude oil that the US imports comes from Canada and is subject to new tariffs from the White House. That tariff cannot be helpful in lowering prices for gasoline at the pump.

So there’s next to no change to the supply side of the equation. What we’re seeing is a reflection of falling demand. Some of that could be explained by the shutdown of the US government, which took place in October and November, and during that time you have fewer people driving to work. There would be no park rangers patrolling the national parks, and businesses that interact with the federal government would have been idle during that period. That would explain part of the falling demand.

We’ve also been experiencing significant job losses in the US, with rising unemployment and low levels of job creation. We’ve also got reduced immigration and increased deportations, so the working population in the US is also falling. All of these factors, and probably a few more, contribute to falling demand for gasoline consumption.

Whenever something happens you have to ask yourself a simple question: are you looking at the cause or the effect? Falling prices at the pump are at the effect end of the equation, not the cause. The cause has to be further upstream in the economy. Falling gasoline consumption reflects falling demand, which reflects economic weakness. You’re not going to get any politician to come out and use the word “recession.” That’s going to guarantee a loss at the midterm elections, which are now only a year away. Instead, they will trumpet a victory of lower gasoline prices at the pump, which are helping ordinary households.

The American consumer has suffered a very real loss of purchasing power since the pandemic. Most of this has been the result of the handling of the pandemic and the government response to the pandemic itself. Labor shortages in the wake of the pandemic did not translate into greater purchasing power for the average consumer. We have a weak economy right now, and the falling gasoline prices are just another clearly visible sign of that.

As you think about that, have an awesome rest of your day. Go make some great things happen, and we’ll talk again tomorrow.

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