Crude oil for November delivery fell about $4 per barrel to just under $22/barrel in the past two days. The drop in oil is coming from expectations of a sharp drop in demand due to economic recession. The U.S. has pressured OPEC allies to keep production flowing and to keep ample supplies in case of emergences, thus it is expected that OPEC ministers will not cut back production as they have done earlier this year in order to keep the price of crude oil close to $25 per barrel.

Price drops helps consumer
Crude oil prices were already showing some pretty good declines over the past several months as economic activity softened in the United States. The drop in prices was limited, however, because OPEC oil ministers were trying to hold the price of crude oil near $25 per barrel. So declines in demand were often accompanied by declines in production. The current state of affairs has changed OPEC behavior and crude oil prices have fallen to their lowest levels since 1999.

If you look closely at the chart below, you'll see that crude oil prices in the neighborhood of $21 - $22 per barrel were associated with unleaded gasoline prices around $1.30 per gallon. Given that the AAA survey showed gasoline prices averaging $1.63 at mid-September, this means that gasoline prices should fall at least 30 cents per gallon - and might decline more if crude oil prices continue to decrease. The drop in gasoline prices will help put more disposable income in the pockets of consumers. With a weekly fill-up of 10 gallons, a 33-cent reduction would amount to $3.30 per week - accumulating to just over $13 per month. That doesn't seem like much, but it is the cost of a movie ticket plus popcorn at the theater!

Reduction in consumer costs won't stop at the gas pump. Home heating oil prices have also declined. With home heating costs reduced this winter, consumers will have more money to spend on other goods and services and help to spur retail sales.

The bottom line? The recession headlines are big and bold these days, but the media can do more harm than good in harping on all the bad news. Layoffs in the airline industry are staggering. But if the layoffs are limited and the general American populous doesn't see a fast run-up in the nation's unemployment rate, consumer confidence may stabilize and even improve from September levels. Lower gasoline prices, coupled with a more accommodative monetary policy (the federal funds rate target at a 7 year low) and fiscal stimulus (tax cuts, increased defense spending) can go a long way in helping to boost economic activity in the coming months.

Evelina M. Tainer, Chief Economist, Econoday