With Oil Prices Down, Will Consumers See Breaks?

In case you haven’t noticed, oil is back at $100 a barrel. That’s after reaching a record high of $147 a barrel on July 11, 2008.

Volatility in the financial markets has pushed oil down as world-wide demand lessens and investors abandon futures contracts for safer investments, says Richard Ebeling, a senior research fellow with think tank American Institute of Economic Research. Still oil prices remain jittery, spurred by worries over production capability in the Gulf of Mexico after Hurricane Ike.

Falling energy prices have an impact in what consumers pay. Don't get too excited, though. "Prices go up like rockets and down like feathers -- and companies pocket the difference," says Mark Cooper, research director for the Consumer Federation of America. Prices are also still 25% higher than they were just one year ago.

From gas to electric bills, here's how lower oil prices affect your bottom line:

Impact: Most new fees are here to stay, although we might see some fare sales.

Higher oil prices were such a drain on airlines that despite the recent drop, industrywide losses could still tally $5.2 billion this year, according to the International Air Transport Association. Between that and oil's ongoing volatility, most airlines remain reluctant to adjust fuel surcharges or reduce fees, says Tom Parsons, CEO of discount airfare site BestFares.com. "They're not out of the woods yet," he says. He expects airlines to keep the bulk of fuel surcharges to hedge against future fuel increases, but offer more fare sales to make the fee more palatable. "The legacy carriers still have to compete with low-cost airfares, so I don't think they have any intention of dropping new fees," he says. In fact, during the past week United (UAUA) doubled its second-bag fee to $50, citing volatile fuel prices. Continental (CAL) announced earlier this month it would start charging $15 for a first checked bag Oct. 7.

International carriers have been a bit more generous. Air France, Lufthansa and Singapore Airlines, among other international carriers, slightly reduced fuel surcharges earlier this month (Air France, for example, knocked off roughly $3 to $20 from surcharges that can top $160). Air Canada announced Thursday that lower fuel prices enabled it to drop its $23 fee to check a second bag.

Impact: A break at the pump -- with better deals just down the road.

Consumers nationwide pay an average $3.81 per gallon, according to AAA's Daily Fuel Gauge Report. It's a far cry from the all-time high of $4.11 set July 17, but not as good as last week's $3.63. "This increase is a blip," reassures Neil Gamson, economist with the Energy Information Administration. Hurricanes Gustav and Ike temporarily disrupted the Gulf Coast supply chain. "It should correct itself in two to three weeks."

Still, prices at the pump remain about 28 cents per gallon higher than they ought to be, based on the drop in crude, estimates Cooper. Consumers won't see the full benefit of lower oil prices until fuel companies pass along the savings over the next several months. (For tips on how to cut the price at the pump further, click here.)

Impact: Even greater incentives on SUVs and trucks as auto makers take advantage of renewed interest in these gas guzzlers.

"We're seeing more consumer interest in some of the larger vehicles as gas prices fall," says Jessica Caldwell, an industry analyst for Edmunds.com. Eager to get these hogs off the lot, auto makers are offering unprecedented incentives, topping $6,000 for some models. Expect still better deals this month. "There are just too many [SUVs and trucks] on the ground for them to stop discounts," she says.

Impact: Sales on store brands, with the potential for more price breaks next year.

"To the extent that costs of manufacturing and transporting food products decline, that [decrease] will pass through the pipeline," says Ebeling. But bear in mind that other factors -- including corn and soybean crop damage from summer floods in the Midwest -- may mitigate any immediate drops. Food prices are still rising, up 0.5% from July to August, according to the Consumer Price Index. Expect store brands to lead the way on price cuts, as retailers aim to shore up their relationships with price-conscious consumers, says Phil Lempert, founder of news site Supermarket Guru.

If oil continues to fall, farmers may find it less tempting to eschew food staples in favor of corn for ethanol, says Ebeling. That would lead to more price drops next spring as anticipated supply increases. (In the meantime, you can cut your bill with smart shopping strategies at the supermarket and warehouse club.)

Impact: Higher winter energy bills -- but not as bad as initially anticipated.

Energy prices dropped 3.1% in August, according to the Consumer Price Index. That stuck a fork in earlier analyst estimates regarding winter heating costs. (This summer, the Energy Information Administration estimated households using home heating oil could expect to spend an extra $585, while those using natural gas and propane would spend an extra $162 and $217, respectively.) "It's likely to be higher than last year, but just how much higher is uncertain," says Gamson.

But because many utilities increased their electricity rates in July, when oil prices were sky-high, don't expect a break there. The EIA projects electricity prices to increase 5.7% this year, a sharp revision from the 2.7% it anticipated in April. (For tips on how to cut those bills, click here.)