What $2 Gas Means to You

This article was originally published by Msn.com on Thursday, Dec. 4, 2008.

The cost of driving has plunged since gasoline topped $4 a gallon in July. But if fuel is cheaper, why are airfares still so high? And can you lock in today's low prices?

By Katherine Reynolds Lewis

Falling gas prices offer a glimmer of hope amid the relentless bad news about the U.S. economy.

The nationwide average for a gallon of regular was $1.90 on Monday. Drivers in Kansas City, Mo., are enjoying what looks to be the nation's cheapest fuel at the moment, rapidly approaching $1.40 a gallon.

A $1 drop in the price of gas puts about $1,250 a year back into a typical family's wallet, said Scott Bernstein, the president of the nonprofit Center for Neighborhood Technology, and prices have fallen twice that much since their $4.11 peak in July. They're even a buck below where they were last Thanksgiving. "It's good news for cash out of pocket," Bernstein said.

The biggest winners? Poor and middle-class households that spend a disproportionate share of their incomes on energy.

"Those are the folks who are the most stretched, and in percentage terms, they'll get the biggest benefit," said Gus Faucher, the director of macroeconomics at Moody's Economy.com.

The respite at the pump buoyed consumer confidence in November despite persistent fears about a recession and job losses. "When gas prices went up, consumers really pulled back," said Dianne Kremer, an analyst at BIGresearch, a consumer research company.


Yet half-price at the pump doesn't mean we're not still paying in many ways. The dwindling economy that is making gasoline cheap also endangers your job and income.

"Household wealth has gone down by $11 trillion from the falling stock prices and house prices," Faucher said. "Our expectation is that will cut $275 billion off consumer spending."

And many of the businesses that raised their prices over the summer to cope with higher energy costs aren't lowering them now, just to stay afloat.

Fuel surcharges linger
Remember those pesky fuel surcharges imposed earlier this year by airlines, cruise lines, taxicabs and other transportation-heavy businesses?

The drop in fuel prices hasn't eliminated all of the extra fees.

"We are in a bit of a hangover," said Elizabeth Merida, a spokeswoman for the Air Transport Association, which represents U.S. airlines. "With the price of fuel being so high for so many months this year, the industry is not going to make a profit this year. Because fuel is our No. 1 cost and energy is such a volatile market, our situation is very tenuous."

In fact, the industry expects to lose $4 billion in 2008, after spending $20 billion more on fuel than in 2007. Every penny increase in a gallon of jet fuel translates to an additional $187 million in annual operating costs, Merida said.

Even airlines that officially eliminated fuel surcharges are folding the costs into ticket prices due to their financial difficulties, so travelers end up paying the same amount.

In late October, Royal Caribbean Cruises eliminated fuel surcharges on new bookings for 2010. But the company will determine on a quarterly basis whether to refund the fuel supplement to passengers traveling in 2009 or who booked 2010 trips before Nov. 10. Any refund, in the form of an onboard credit, will be granted based on the expected price of fuel for the coming quarter.

What goes up, comes down slowly
Even those fuel surcharges that are officially eliminated may take some time to go away.

Fuel surcharges imposed by United Parcel Service are updated the first Monday of the month, based on the price 45 days earlier, company spokeswoman Karen Cole said. So you often are paying a surcharge according to what gasoline cost two months ago.

"The last year has been unprecedented, the amount of change we've seen," said Cole, noting that the surcharge doesn't make up all of the energy costs that UPS bears. "Fuel prices for us are still up 62% year to date over last year."

Many pizza delivery outfits are still charging fees that take fuel costs into account.

At Domino's, the last major pizza delivery chain to impose delivery charges, drivers use their own cars and are reimbursed for wear and tear in addition to fuel, spokesman Tim McIntyre said via e-mail.

"Some franchisees have instituted sliding scales for reimbursing drivers, which go up and down based on fuel prices," McIntyre wrote.

Can you lock in low prices?
Seeing how reluctant companies are to give customers the benefit of a drop in fuel prices, you may be interested in locking in the current low costs yourself.

You could pursue a complicated strategy involving futures markets or exchange-traded funds, but you'd probably end up spending more on transaction fees even if the strategy worked, said Ramit Sethi, the founder of I Will Teach You to Be Rich, a personal-finance blog.

Instead, you can simply pretend that gas prices are $4 a gallon, and pocket the difference between that and the price at the pump. That's what Sethi does.

"I take the amount of money I would be spending and automatically send it to my savings account," Sethi said. "If gas prices go back up, I can use this money as a buffer."

Currently, that's about $25 a week, which his bank automatically transfers into a savings account. Every three months he looks at how much he spent on gasoline and adjusts the transfer amount to account for the difference.

If that's not complicated enough, you can try buying an exchange-traded fund that tracks the price of crude. Theoretically, you'll get your savings back and profit from the rise in oil prices as well.

Americans turn practical
Indeed, BIGresearch finds that most consumers are pocketing the current savings due to low gas prices, rather than splurging.

"The majority is definitely having a savings mind-set right now," BIGresearch's Kremer said.

The percentage of people who say they're focused on needs rather than wants is at an all-time high for the survey, which began in 2001.

People are meeting those needs at discounters like Wal-Mart Stores, one of the few retailers doing well in this tough economy.

Eduardo Castro-Wright, the chief executive of the retailer's U.S. division, said in a recent conference call that the drop in gas prices "almost immediately" affected the behavior of Wal-Mart's customers.

In rural areas, where customers have to drive farther to shop, visits to stores had fallen over the year to September as prices peaked over $4 per gallon. But in October, as fuel prices dropped below $2.25 per gallon, customer traffic rose, Castro-Wright said.

OK, how long can this last?
The good news is that a slowing global economy should reduce the demand for crude oil and keep prices relatively low in 2009, to an average of $2.37 a gallon for regular-grade gasoline, the Energy Information Administration projects.

Home heating oil is expected to be affordable from October through March, about 17% cheaper than last winter. Propane prices will decline 10% from last winter, the administration forecasts.

Part of the decline in gasoline demand is simply seasonal, but a large part is a newly fuel-conscious America cutting back. Miles driven by U.S. car owners fell 3.5% through September, the Department of Transportation reported Nov. 18.

Lower gas prices have failed to boost sales of gas-guzzling trucks or SUVs, said Jessica Caldwell, in industry analyst for Edmunds.com.

"We see a rise -- slightly -- in the consideration of large trucks and SUVs, but we haven't seen it translate into sales. The only rise we saw was in smaller vehicles, like the Honda Fit and Nissan Versa, which probably had more to do with the price point than gas prices," Caldwell said.