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Gas prices stay low as Saudis try to "smoke out" US

Gas prices are at their lowest level since 2009. AAA reports that prices have declined 89 straight days, a new record. With the national average sitting at $2.38 the biggest winners are consumers--the nearly 100 million people hitting the road for holiday travel will see the lowest gas prices in six years.

Yahoo Finance’s Rick Newman says the drop in price is basically a stimulus plan for Americans: “Every time you fill up it’s like 10 to 20 cents cheaper. Citigroup just put a new figure on it, they’re now saying average savings of $1,150 for the typical family over the course of the year. ” Saving more at the pump is allowing people to spend more elsewhere and boost the economy.

The Commerce Department announced today that the U.S economy grew at a rate of 5.0% in the third quarter, it’s highest in eleven years. The growth was fueled in part by a rise in consumer spending, increasing 3.2% this quarter.

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Low oil prices and vast supply could result in gas prices continuing to decline and consumers having extra cash to power the economy. Saudi Arabia’s oil minister, Ali al-Naimi says he doesn’t see OPEC cutting production anytime soon, even if oil drops to $20 a barrel. “The Saudis seem to be thinking, we’re basically trying to smoke out the American producers. See how low they can go,” says Newman.

Saudi Arabia, the world’s largest oil exporter also has one of the cheapest production costs. This makes it easier for the Saudis to ride out low prices and maintain market share. Newman says this may work against them: “What if the Saudis are saying we’re going to make a big market share play? It could backfire. Other producers could end up producing for cheaper and cheaper.” Lower costs could lead to volatility in the energy sector.

When oil first started its downward trend this year it was met with skepticism. “The markets freaked out for a while. Looked around and said what’s going to blow up? Nothing blew up right away. The longer this goes on the more likely a blow up becomes,” says Newman. If oil prices continue to fall in the New Year and beyond something is going to break. Where the disruption occurs will be the big question. It could be over-leveraged companies in the energy sector, or the banks lending to these businesses, or even oil exporting countries themselves.

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