Question: Why are gasoline prices now going down? Should this affect one's portfolio?

A BuyandHolder

Answer:

Dear BuyandHolder,

Two timely questions, neither of which has surefire answers. But here are some thoughts.

Of course, regardless of the stocks held in your portfolio, lower prices are obviously good news for drivers and for those filling up their oil tanks in advance of the winter season and high usage of heating oil.

The average price of gasoline at the pump as we go to press is $2.78 per gallon. A year ago it was $3.01 and two years ago, $3.50.

Reasons why gasoline prices may drop:

1) The simple law of supply and demand. Right now, the summer driving season is coming to a close. That means fewer Americans are getting behind the wheel for an extended driving trip. Labor Day weekend is traditionally seen as the official close of the summer driving season.

2) A heightened awareness of high prices. As Americans have faced higher prices at the pump, they have learned to cut back on what I call "free-range driving." For example, many drivers now combine trips (to the mall, post office, grocery store, work and their kids' soccer games). Car pools are also on the uptick, often encouraged by new incentives for sharing rides to and from work. These trends have brought about a lower demand for gasoline.

3) Environmental impact. The new enthusiasm for "green" cars, sparked by environmentalists and high-profile figures (Al Gore, among others) has had an impact. More Americans are aware of the negative impact gas guzzling cars have on air quality. In many circles, big cars are starting to be viewed not only as economically unwise but also as socially and environmentally unattractive.

4) The economy. Generally there is lower demand when there is impending (or confirmed) negative news about the economy. Currently, the weak subprime mortgage sector is thought to be contributing factor to weaker energy demands.

Your Portfolio

What impact will lower gasoline prices have on your portfolio? Without knowing what stocks you are currently holding, I can only make some general comments.

You might want to consider diversifying your investments to include companies that manufacture bicycles, scooters & motorcycles. Many cities (even New York), have recently instituted bike lanes, with local governments insisting that bikes and scooters have almost equal say with automobiles. And, then there's the more obvious area of hybrid and low mileage cars.

Secondly, you might want to diversify your holdings so that you own shares of a refinery company, an oilfield technology company, a high dividend paying U.S. retailer and a European or multinational oil company.

Make certain that any companies you add to your portfolio are operating at a healthy profit.

Bottom Line

To find the price of gasoline at the pump in U.S. and Canadian cities, go to www.gasbuddy.com.

Stay tuned...next week we will take a look at OPEC, the spot market and the futures market.