The price of gasoline has been on a steady decline lately. In fact, in many parts of the country the price has reached less than $3 a gallon.
According to AAA, six months ago the national average for the price of a gallon of gasoline was $3.68. As of December 18, 2014 it was $2.47 — a decrease of $1.21. That’s quite a drop for just a six month timeframe.
What does this mean for our economy? Usually when the gas at the pump takes a nose dive, so does the stock market.
How can you best handle the fluctuating price drop, while preparing for an unknown financial future?
There area couple of reasons for the drastic drop:
- Decreased Global Demand: As various economies around the world falter, demand for oil has decreased contributing to an increase in supply.
- New Oil Sources: Non-OPEC countries, such as the U.S. and Canada have been increasing the amount of oil they produce which contributes to an increase in supply.
- OPEC Reaction: Normally when there is an increase in supply and oil prices sink, the nations of OPEC pull back on production, resulting in a decrease in oil reserves and prices begin to increase. However, this time around OPEC is not changing their production quotas. The theory is, they’re purposefully allowing the price of oil to go low enough to make the production of oil by countries (like the U.S. and Canada) more expensive than what they can sell it for. The hope is they would shut down operations, allowing OPEC to then more easily control the price, and their profits.
This may be an oversimplification, but for the average citizen I think it’s a pretty good representation of what’s going on.
As consumers we spend an enormous amount of energy talking about the price of gasoline. Turn on the news and you’ll hear about what the current price at the pump is.
Listen to the hallway talk at work and someone will mention the price of gasoline, whether it went up or down.
But here are two reasons why shouldn’t get all that excited about the ups-and-downs of the price of gasoline:
- Wild price fluctuations are normal: The price of oil doesn’t follow the normal rules of supply and demand — that’s just a fact. There’s a whole list of things that factor into the price of oil, including OPEC nations purposefully manipulating the market (in the U.S. we would call that price fixing, or collusion), oil companies mysteriously shutting down refineries at the most inconvenient times for consumers, or any kind of conflict in the Middle East. Wild price fluctuations are normal, and shouldn’t be surprising to anyone anymore.
- It doesn’t make a huge difference in your budget: I normally fill up our mini-van, which has a 20 gallon tank, about once-a-week. The decline of $1.21 per gallon therefore saves me just over $24 a week. I certainly wouldn’t complain about reducing my expenses by $24 a week, but it isn’t a large percentage of my weekly budget. Likewise, it probably doesn’t make a big difference in your weekly budget, at least not enough to change the way you spend.
The key to dealing with fluctuating gas prices is to pretend like they don’t fluctuate. We budget $75 a week for gasoline, so unless the price of gasoline exceeds $3.75 a gallon, I’ll stay within my budget.
Right now it only costs about $50 to fill up the family bus. The unused funds go into a general slush fund. When that slush fund has a large enough balance, some of the money is transferred to savings. This is the same manner in which we handle any budget underage.
Dealing with gas prices in this manner allows our budget to stay the same, including using a general process for dealing with a budget overages and underages for any of our spending buckets. Consistency is the key to being successful with your finances, and learning to stay the course even in the face of peaks and valleys of gas prices.
Which is why my answer to handling the current gas price fluctuation is normally, “Huh, I hadn’t noticed”.
How do you handle fluctuations in gas prices? What affect does it have on your budget, if any?