As Gas Prices Drop, Yankees Stay Home And Buy Fewer Cars (XOM)(F)(GM)

Last summer, a gallon of gas cost over $4. Now the prices has dropped below two bucks and is still falling. The sharp drop in crude oil is to blame.

Intuition would say that people should drive more as the price at the pump plummets, but it is not working out that way.

According to MarketWatch, "Even though prices at the pump are now about 45% lower than they were a year ago and significantly below $2 a gallon, 52% of Americans told Gallup that they have not gone back to their old gas-guzzling ways." Poor people are driving even less that rich ones. They are probably still concerned about their jobs and mortgage payments.

The average citizen may realize that while gas is down now, it is going back up. Lower profits on cheap oil will keep companies such as Exxon Mobil (XOM) from spending more on exploration. That will keep the number of barrels of oil coming out of the ground relatively low. OPEC nations need higher crude prices to keep their economies running. Oil supply will almost certainly be cut again nearly next year.

There is another reason, and perhaps a more important one, that drivers are sitting at home. The less mileage put on a car, the longer its lasts. That pushes the need to spend a lot of money on a new vehicle out several months. Good for the pocket book, but bad for car sales. Another reason Ford (F) and GM (GM) should be worried about 2009.

Douglas A. McIntyre