Lower pump price shouldn’t spur splurge

As the summer's record gasoline prices slouch back toward $4 a gallon, Michael Ludwig remains unimpressed.

That's because he knows the score.

The drop from a local record average of $4.27 a gallon in June to Monday's $4.02 a gallon is all part of a scheme: They run up prices, explained Ludwig as he tanked up Monday on Sahara Avenue, and when consumers cry uncle, they bring prices down just enough to make drivers grateful.

"Give us a little, and make us praise 'em," said Ludwig, referring to the philosophies of noted Italian energy economist and political theorist Niccolò Machiavelli. "They say, 'Oh, look, you got a break.' It's the Machiavelli effect. That's all they're doing right now."

"They"?

"The government," Ludwig elaborated.

Actually, energy analysts can point to concrete reasons fuel prices are poised to fall below $4 a gallon for the first time since the spring. But experts also say the falloff in gasoline expenses won't necessarily translate into higher consumer spending or a return to historic levels of fuel consumption.

Phil Flynn, a vice president and energy analyst with Alaron Trading Corp. in Chicago, said the decline in crude-oil prices has helped push down gasoline prices. Crude ended Monday at $124.73 on the New York Mercantile Exchange, compared with a high of $147.02 on July 11. Crude makes up more than half a gallon of gasoline, so cheaper crude means less-expensive fuel.

Plus, the U.S. dollar shows signs of stabilizing, Flynn noted. That's important because the weaker the dollar, the more dollars oil exporters demand from buyers in America. That drives up the price of oil per barrel. A stronger dollar exerts the opposite effect.

Finally, thanks to record prices, demand for gasoline faltered significantly in the spring, Flynn said.

Drivers used 3.7 percent less gasoline in May than they did a year earlier. That decline, equivalent to 9.6 billion miles of driving distance, represents the biggest drop in 66 years of federal tracking. As motorists consume less fuel, supplies rise and prices fall. Gasoline stockpiles today run more than 6 percent above inventories at the same time last year, and that's partly why fuel prices sank Monday to their lowest -- $3.95 a gallon -- since May 26, Flynn said.

Price breaks at the pump aren't likely to restore Americans' vigorous shopping and consumption habits, though.

Every penny saved on energy gives consumers more to spend, but with much of the economy continuing to slump, don't expect big shopping sprees, said Brian Gordon, a principal of local research firm Applied Analysis.

"(Price breaks) may have a modest effect, but the overriding factor right now is housing," Gordon said. "Every little bit contributes to overall improvement of the economy, but gas prices are just one element. To see substantial improvements in consumer spending, other factors such as the residential market will play a bigger role."

Flynn agreed that some of the "demand destruction" high fuel prices created will be permanent. Drivers won't simply jump back into their gas-chugging pickups and sport-utility vehicles, because too much of the rest of the economy continues to hurt, he said.

Local drivers filling up at a Terrible Herbst station on Sahara agreed Monday that they're unlikely to revert to previous habits, even with the last month's 25-cent drop in prices.

Glancing at a sign advertising fuel at $4.01 a gallon, Las Vegan Kelly Rebello said prices below $4 might provide a psychological boost.

"But it's still not going to help when I look at my budget," said Rebello, who works at photography studio Bernhard & Williams. "It's still very painful at the pump."

Rebello's household has cut back on groceries, utilities and gasoline. She no longer tanks up her 2002 Ford Taurus completely; she goes half way, spending $30 at a time instead of the $60 a full tank would cost. She said she hopes prices will get back to around $2.50 a gallon, but even if costs stumble that much, she plans to hang on to some of her new budget efficiencies.

Nor does Las Vegan Alex Aman expect to splurge thanks to lower gasoline prices.

Aman, who works for Station Casinos, said he's downsized "everything," especially his food and allowance budgets. If prices dip to between $2 and $3 a gallon, Aman said, he won't reinstate spending.

"I'd probably save the extra for in the future, in case something like this happens again," he said.

Ludwig, who owns the Angles beauty shop at Lake Mead and Rampart boulevards, said higher fuel prices forced a drop off in the number of visits clients make to his store. It's a dynamic that's hurting small businesses across the valley, he said, and he doesn't think consumers would dramatically alter current behaviors unless fuel prices retrenched to about $2 a gallon.

"It's a mental process," he said. "Money is always a mental process for people. They think they can't spend because of gas prices. It's hurting everybody, because people are cutting back."

Flynn said he doesn't foresee prices at $2 a gallon anytime soon. But, barring catastrophes such as big hurricanes along the oil-heavy Gulf Coast, heightened tensions with nuclear aspirant Iran and civil unrest inside petroleum exporting countries such as Nigeria, gasoline should fall at least 25 cents to 50 cents a gallon by Labor Day, Flynn said. And that's a conservative estimate. A drop to about $3 a gallon isn't impossible, Flynn said.

Ludwig said he's looking forward to the price breaks.

"It'll make us 'Machiavelli' slaves happy."

Contact reporter Jennifer Robison at jrobison@reviewjournal.com or 702-380-4512.