Thursday, May 18, 2006

How High is the Price of Gasoline?

Is the price of gasoline really that high?

The average retail price of gasoline in the United States is currently about $2.95.

Over the last two and a half months, we have seen gasoline demand exactly flat versus the same period last year. While given weeks and months often show flat or even negative demand growth, flat demand over a 10 week period is rare. Is this real demand destruction? Is the high price of energy finally cutting into Americans' discretionary spending?

Just this week we saw the release of inflation numbers which had quite a significant effect on the stock market. Monday morning all the talk was of Dow 13,000 on CNBC. By Wednesday evening the majority voted for "beginning of the end" in a poll conducted by Larry Kudlow.

A year ago, I was of the opinion that we would not change our behavior until gasoline reached $3.50. I still think that is largely true. However, what if it takes another year or two to get to $3.50? Will we be so acclimated to the price by then, that it will take $5 gasoline to make an impression. I think it is all about the timeframe - how fast the price rises, more than the price itself.

For gasoline to be $3.50, oil needs to be about $110. $5 requires at least $160 oil. We still have a long way to go. The fact is that if we start in 1996, gasoline has only increased, in inflation adjusted terms, by 7% per year. The huge run-up since early 2004 masks a relatively low, stable price for all of the previous two decades.

As far as inflation goes, if a 50% increase in the price of gasoline in the last two years has contributed a few percentage points to an overall rise in the cost of living, then for it to continue to have that effect, gasoline has to continue to rise at the rate of a dollar per year. I don't think that will happen. No dollar rise, no inflation.

I remain unconvinced by anecdotal horror stories of gasoline-use aired with increasing frequency everyday by the mainstream press. The EIA releases its weekly gasoline demand numbers every Wednesday at 1pm. I will continue to pay attention to these figures.

Support a robust gas tax now!
Oil CEO

1 Comments:

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