Can you believe it? Only a few months ago we were screaming bloody murder over the perils of inflation; now the economy is faced with the prospects of massive deflation.
A gallon of gasoline now costs $1.90 on average nationwide, down more than 50% in roughly two months. Adjusted for inflation, that's less than it cost in 2000.
What gives?
Flashback to Econ 101: Inflation is caused by too much money chasing too few goods. Right now, there's an unprecedented amount of money in the financial system as Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson print their little hearts out. But the lack of "chasing" is sending prices into the tank. In fact, October was the largest consumer-price decline since the number-crunchers have been keeping tabs.
Back in June, I suggested you should embrace $4 gasoline for the changes it would bring in energy technology, be it wind, solar, hydro, electric cars, whatever. It worked for a while. People drove less, public transportation demand surged, electric car companies caught people's attention, trucks and SUVs made by GM (NYSE:GM) and Ford (NYSE:F) lost their luster, and high prices made it possible for energy giants like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) to invest in projects that wouldn't otherwise make economic sense. "The cure for high prices is higher prices," the saying goes.
What could come back to haunt us in coming years is that an equally powerful shift could cancel energy investment, reignite demand for gas guzzlers, and cause consumers to throw conservation back by the wayside. Once the economy refuels, we'll almost certainly be back in the same energy squeeze we were in this summer, albeit potentially much worse. That's the paradox to energy prices: The lower they go now, the higher they'll be when the economy picks up. As President-elect Barack Obama said the other day, "Prices go back down and suddenly we act like it's not important … And, as a consequence, we never make any progress."
So how has gasoline's plunging price swayed your driving habits? Driving more? Driving less? Fred Flintstone-ing it around town? Take a second to weigh in via the Fool poll below, and share your thoughts in the comment section if you feel so inclined.
