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During an economic downturn, gas prices may fall due to decreased demand as people turn to public transportation or alternative means of transportation. Manufacturers may reduce production, and governments may regulate prices to stimulate the economy. However, the relationship between the economy and gas prices varies. When gas prices fall, some industries may reduce operations while transportation costs decrease, benefiting other sectors.
While it’s true that the price of gasoline and other petroleum products doesn’t automatically fall during a recession or depression, economic conditions often affect gas prices. When a bad economy drives gas prices down, there are a few factors that often combine to create the situation. Here are some examples of what can lead to a change in the price of gas during an economic downturn.
At the heart of any period of falling gas prices is the question of supply and demand. As the economy begins to impact people’s ability to pay for gas, they often turn to using public transportation rather than driving a personal vehicle. Some people are starting to use alternative means of transportation to minimize their use of gasoline, such as riding a motorcycle. Others may turn to bicycles for short commutes, totally eliminating the need to use petrol for transportation purposes.
As demand for gasoline begins to ease, manufacturers make adjustments to cope with the shrinking market. This may involve reducing production as a means of preventing a glut of product on the market. However, if demand drops substantially, suppliers may choose to cut profits to move product. This means that gas prices drop to a level where people can reasonably afford to buy petrol again.
Governments can also intervene to regulate gasoline prices as a means of stimulating a struggling economy. By creating a situation where gas prices fall, consumer confidence is sometimes partially restored and people start using disposable income to make more purchases of goods and services of all kinds. In theory, this stimulates production in many sectors and can help 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 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 to divert funds normally spent on gasoline purchases towards other obligations. Only when inflated gas prices drop to acceptable levels are consumers allowed to take a second look.
Several situations arise when gas prices fall. Industries associated with the production of petroleum products may find it necessary to partially reduce operations. This means laying off staff, many of whom then need assistance to afford basics such as food, clothing and shelter. Side businesses that sell gasoline become less profitable, especially those that depend on gasoline sales for much of their profit. At the same time, transportation costs go down, making it possible to ship goods to stores which in turn can afford to sell the goods at more competitive prices. Thus, one sector of the economy is helped when gas prices fall while others encounter challenging circumstances.
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