Higher Gas Prices – The Downside of an Improving Economy

Over the past three weeks there have been several major indicators that “The Great Recession” is finally starting to ease and turn the corner.

First, the Case-Shiller index showed the first month-over-month increase in home prices, the first such increase in nearly three years.  In other housing related news, sales of existing homes climbed for the third straight month.

Then there was the better than expected preliminary reading on the second quarter GDP, which showed the economy dipped at only a 1% annual pace between April and June.  Economist had been expecting the second quarter GDP to decline at 1.5%.

Finally, this past Friday, the July job report showed the economy lost “only” 247,000 jobs and unemployment actually dipped from 9.5% to 9.4%, the first such dip in 19 months.  Again, economists were expecting things to get worse, predicting unemployment would jump to 9.6%.

This is the sort of data we need to see on a consistent basis in order to know the economy has finally turned the corner and that this recession — the longest since WWII — is finally over.

That being said, it’s not as if this economic turn around won’t come without a little bit of pain, namely higher oil and gasoline prices.

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Oil Demand Down .25%, Price Down 56%. That’s Odd.

Without a doubt, 2008 was a crazy year for oil and gasoline prices.  Not only did both oil and gasoline hit record high prices — $147 per barrel and $4.12 per gallon, respectively — but both also managed to fall to five year lows.

When looking at the year in total, from January 1 to December 31, the price of oil fell from roughly $100 per barrel to roughly $44 per barrel, or about 56 percent.

Obviously, it is pretty abnormal that one of the world’s most valuable natural resources would lose over half of its market value.  The only real and logical explanation behind the drop in price would be an equally dramatic decrease in world wide demand, right?

Well, in this case, wrong.

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Gas Prices Spike, Sign of Things to Come?

Over the past five days, the national average price of a gallon of regular unleaded gasoline has climbed more than 11 cents, to just over $1.75 per gallon.  The last time the price of gas was this “expensive” was back on December 3.

Although, compared to last summer, I think most of us are willing to live with this relatively mundane price increase.

Most, if not all of the jump in gas prices can be contributed to the fact that the price of oil had climbed from the low $30s just a few weeks ago, to yesterday’s closing price of just under $50 per barrel.

However, today the price of oil fell over 12% to under $43 per barrel thanks to a government report showed a larger than expected increase in crude inventories.

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Gas Prices Bottoming Out? Who Knows?!?

After hitting a nearly five year low of $1.63 per gallon, the national average price for a gallon of gasoline has crept up ever so slightly the past couple of days, and now stands at $1.67 per gallon. 

However, with the economy seeming to get worse with each passing week, nobody really seems to care about or have noticed what many experts believe is the potential bottoming of gasoline prices.

Currently, every state in the continental United States is reporting an average gas price below $2 per gallon, with Utah and Wyoming reporting the lowest average prices at $1.42 per gallon.  New York currently has the highest state-wide average price at $1.91 per gallon.  Both Hawaii and Alaska are reporting average prices just under $2.50 per gallon.

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What is the Fair Value of Oil?

For much of the past two years, we (meaning most of the world) have been complaining about high oil prices.  As the price per barrel climbed past once unthinkable milestones – $75, $100, $125 and then nearly $150 – the complaints grew louder and louder.

Now that the price of a barrel of crude oil has fallen in excess of 50% from this summer’s record high (after falling as much as 60% before this week’s slight rebound) many of the world’s oil producers – OPEC in particular – are complaining.

In fact, even after recently announcing a 1.5 million barrel per day production cut, OPEC is rumored to be considering another cut of similar size in order to defend an oil price of between $80 and $100 per barrel.

With all of this being said, I think it begs the following question: what exactly is the fair value of oil?

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Gas Prices Lower Than They Were a Year Ago

For the first time in what feels like forever, the price of gasoline is less expensive than it was exactly a year ago.

While this would usually be reason for joy, it appears that the major factor behind the significant decline in the prices of oil and gasoline is the rapidly deteriorating world economy.

Today’s national average price of gas stands at $2.73 per gallon, which is three cents below where it was exactly 12 months ago.  While $2.73 for a gallon of gas certainly isn’t cheap by any stretch of the imagination, it’s certainly a heck of a lot more affordable than what we dealt with for most of this year.

Since hitting a record high of $4.12 per gallon on July 14, the price of gas has fallen by over 33%.  Over the past month alone the price of gas has fallen nearly 25% – thanks to the credit crisis and fears of a very deep and painful recession.

Currently, there are only five states reporting an average gas price above $3 per gallon, with Alaska having the highest state wide average price at $3.60 per gallon.  Conversely, there are now ten states reporting an average gas price below $2.50 per gallon, with Oklahoma having the lowest state wide average price at $2.27.

In an effort to help stem the tide of falling oil prices – which are down nearly 60% from this summer’s record highs – OPEC has announced that it will cut crude oil production by 1.5 million barrels per day.  However, because this cut was less than the expected 2 million barrel per day cut, the price of oil fell about $3 per barrel after the announcement.

This likely means gas prices will continue to fall in the near term.  While this is good news for anyone with a car – additionally, this will effectively kill inflationary pressures – the trade off is we’re having to deal with the worst economy in decades.

Unfortunately, it looks like things are going to get a lot worse – higher unemployment, further declines in stock and home prices, and sinking corporate profits – before they start to get any better.

Suck It, OPEC.

Apparently a lot has happened since my last post.

The stock, credit and housing markets have been in shambles; the price of oil has now fallen over 50% from its record highs set this past July; and the price of gasoline has dropped well below the psychologically important $3 mark.

As of this afternoon, the national average price of a gallon of regular unleaded gasoline stood at $2.88, which is about 30% below this summer’s peak prices.  Over the past month alone, the price of gas has fallen nearly 23%.  Additionally, the price of gasoline is now only 7% higher than what it was at this point last year.

Currently every state is reporting an average price below $4 per gallon, and there are only 13 states with average prices above $3 per gallon.  Hawaii has the highest state-wide average price at $3.77 per gallon, while Oklahoma has the lowest state-wide average price at $2.40 per gallon.

Unfortunately, this record price decline might be nearing an end.  The Organization of Petroleum Exporting Countries (OPEC) will be holding a meeting this coming Friday to discuss massive production cuts in order to protect oil prices.  It is widely speculated that OPEC will announce daily production cuts of between 1.5 million and 2 million barrels.

Given the world’s current economic state, it is very doubtful that this production cut will cause oil prices – and subsequently gasoline prices – to shoot back up towards their record highs.  However, it’s not unreasonable to expect prices to, at the very least, stay at their current levels or rise slightly.

Price of Oil Down Over $10, Gasoline Prices Keep Dropping

Thanks to growing fears that the United States has entered a prolonged recession – with some saying we’re about to see the second Great Depression – the price of oil fell over $10 per barrel today and closed below $100 for the first time since last Monday.

Most of today’s market action – marked by the DOW’s single largest daily point drop, the S&P and NASDAQ both losing roughly nine percent and oil’s second largest daily price decline – came about thanks to Congress balking at the proposed $700 billion Wall Street bailout.

This bailout, which was agreed upon in principle Sunday evening, was meant to help restore confidence in the financial markets by having the Treasury Department buy hard to value mortgage backed securities from struggling financial firms in an effort to get them lending to each other, businesses and consumers.

In addition to the House’s vote, several European bank failures helped to push the dollar up against the euro.  As I’m sure you’ve come to find out over the past several months, a stronger dollar tends to push commodity prices lower.

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Just So You Know, We Are Running Out of Time

Here we go again.

Thanks to uncertainty regarding the proposed U.S. Government bailout of the financial sector (which, by the way, is looking more like a band-aid on a bullet wound), the dollar having its single worst day against the euro and other currencies, and commodity traders covering their short sales, the price of crude oil climbed over $16 per barrel today – the single largest daily price increase on record.

And it could have been worse.  At today’s peak, the price of oil was up over $25 from Friday’s closing price.

While this may end up being a one day phenomenon, the fact remains oil is still very much in a bull market, and what we thought was the commodity bubble popping might have been nothing more than slight correction during an extended upward trend.

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Economic Problems – Less Pain at the Pump, More Pain for you Everywhere Else

The price of oil fell sharply today, thanks to the collapse of investment house Lehman Brothers, and the growing concern that the United States is only in the beginning stages of a prolonged economic downturn.

After falling to as low as $94.13 per barrel, the price of oil closed the trading day at $95.71, which was down $5.47 from Friday’s close.  Today’s closing price represents oil’s lowest price since back in February, and means the value of oil has fallen nearly 35% since hitting a record high of over $147 back in mid-July.

Despite today’s drop in the price of oil, gasoline prices continued to rise across the country thanks to damage caused by Hurricane Ike.  While refinery capacity is slowly coming back up, at the height of the shut downs and evacuations, nearly 25% of the United States’ fuel refinery capacity was out of commission, causing gas prices to climb significantly higher for the first time in over two months.


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