If an alien economist touched down on planet earth say on July 5th, he, she, or it might have reasonably concluded by July 25th that the world was in a bull market for stocks and a bear market for commodities.
Today’s action gives pause to that premature extrapolation. Oil and most other commodities moved higher, and financial markets moved sharply lower, with a weak Dollar and the old reliable “trouble in Nigeria” delivering déjà vu all over again as Yogi might say.
Here’s the scorecard for July 28, 2008:
The average U.S. retail gasoline price today was $3.958 gal, but truth is, if you averaged the cheapest price available today to consumers across the country, the number might be closer to $3.85 gal. In any case, we’ll probably see the nationwide numbers dip into the $3.75-$3.85 gal range in the next ten days or so.
I’ve been asked many times in the last week why fuel prices seem to rise at a rocket’s pace and fall in feather-like fashion. With that in mind, I’ve reprinted a story we published in Oil Express some 5 ½ years ago that is still relevant today. It appears at the end of this post.
Today’s price adds up to a daily U.S. consumer expense of $1.553-billion. If prices drop to say $3.82 gal, we’ll move below the $1.5-billion per diem rate. But let’s not lose our heads: this compares to a daily gasoline bill of $1.141-billion on this day last year; $920-million on this date in 2005; $594-million for July 28, 2003; and $540-million for late July 2003.
Demand Destruction Gets More Attention
The $1.5-billion to $1.6-billion per diem level may be a tipping point of sorts. We added nearly $100-million/day in costs during each of the first six months of the year (the low point was about $940-million/day in February) but higher prices have clearly brought lower demand. Consider that the peak of $1.638-billion came on June 20 when retail prices averaged $4.0747 gal (the 2008 price peak was officially $4.114 gal on July 17). The record expense in late June came with the highest Summer demand so far, at 9.357-million bbl per day, or about 393-million gal in 24 hours.
Today, we saw the Energy Information Administration revise demand lower for the month of May. EIA estimated that gasoline demand in the month was 9.216-million bbl per day, or about 92,000 bbl per day lower than the previously published figure.
This jives with what we hear from the field. Chain retailers and Ma & Pa distributors complain that various government and private entities have overstated real demand.
It is also the tenth consecutive month of a year—versus-year gasoline demand drop.
I would be surprised if we see any of the remaining 20+ weeks show gasoline demand higher than the same week in 2007. Costs of $1.5-billion or so have a way of getting one’s attention.
In the meantime, another government group - - the Federal Highway Administration (FHA) - - today reported that Americans drove 3.7%, or 9.6-billion fewer miles in May 2008 than they did a year ago. I’m not quite sure how they count that data; here in N.J., the traffic doesn’t move much on weekends so perhaps it’s less taxing to the sentinels.
Nonsense & Coincidence
It’s not coincidence that oil prices dropped as U.S. stock prices rallied (I’ve written many times in this space about the largest fundamental in the oil market - - money flow). And it’s not coincidence that weak economic data led to some reevaluations in domestic and global growth projections, which in turn spooked some investment money out of the market. However, it is pure nonsense to suggest that President Bush’ lifting of the executive ban on drilling had any impact on the marketplace. It is simIt could have an impact in time for the Summer Olympics - - but I’m speaking about the Summer Olympics in 2016.
This is not a criticism of drilling in places where oil can be found responsibly. Finding oil and other sources of energy in stable areas is part of the solution, together with conservation, and sound public policy.
One could just as easily make a connection between some of the congressional threats to curb speculation and the July oil price drop. Or, one could have connected the oil price drop to Bret Favre’s desire to return to the NFL.
The historical record is quite clear. Crude oil prices are tidal, and the high Spring/early Summer tide is followed by an average ebb tide of about 19% for crude in the last 25 years. That ebb can be called a correction; an epiphany; a midsummer enema; a reality check; or plain old fashioned boredom, but the price drop is not driven by Washington, at least not in the last two decades when nothing remotely resembling bipartisan energy policymaking has been hatched by federal lawmakers.
The bad news: there is often a second high tide that commences in late Summer and runs through early October.
The oil crisis is not over. It is merely on a Summer hiatus.
Addendum: Here’s that “rocket and feather” story from 2003 that I promised a bit earlier.
Tuesday, December 09, 2003 10:04:17 AM
UNIVERSITY STUDY: CONSUMERS TO BLAME WHEN PUMP PRICES ARE SLOW TO FALL
When the price at the pump takes off like a rocket, majors and marketers are gouging consumers, right?
And when the price floats down like a feather, those same guys are pocketing unconscionable profits.
Either way, it's time to round up the usual suspects for another Congressional hearing, a new photo op.
Or, is it?
A just-published study says consumers are not blameless when it comes to price behavior at the pump. Since they shop less aggressively when prices are falling, there is no impetus on marketers to lower prices, so the response at the pump is slower.
Margin-squeezed marketers may well be less than astonished by the insights offered by the University of California Energy Institute study. Nevertheless, it does point to a different price culprit, and that's a change.
For the study, the report looked at prices posted by 420 stations in the San Diego area from January 2000 to December 2001. Los Angeles spot market prices, collected by DOE, were used as the wholesale price. The object was to try to figure out why pump prices respond more slowly in a falling market.
The conclusion: when consumers are deciding where to fill up, the price they expect to pay is based on what they paid during their previous purchases. If the consumer sees a price that is low, compared to when he last bought fuel, he thinks there's only a small chance that he'll find anything cheaper. Therefore, he's less likely to search when prices are lower than expected.
The consumer's lack of aggression has a market effect. When fewer
drivers search, there's less competition between firms, leading to higher margins and slower-moving prices. Companies lower their price just enough to prevent consumers from making that extra effort to search out cheaper prices.
"Although margins are high, consumers are not searching, so firms are unable to attract more customers by lowering price," says the study. "Prices fall slowly and margins remain high in subsequent periods because firms continue to lower prices only enough to prevent search each period."
Basically, the study says, the size of a firm's margin determines the speed of price response at the pump. There is little difference in behavior to a positive and negative cost change - positive price shocks lead to low margins and fast response, and negative cost shocks lead to high margins and slow response.
***Here's what happened over 95 weeks in San Diego***
#of weeks Av.profit Periods w.
large price increases 22 4.81ct/gal
Periods w.
little price change 33 13.37ct/gal
Period with large
negative price change 40 29.91ct/gal
* Periods are defined as having a large increase or decrease in price if the price changed by more than 1ct/gal from the previous period.
In effect, marketers enjoyed fatter margins for only 40 weeks, and lower margins for 55 weeks.
The more volatile the wholesale market is, the harder it is for consumers to determine if a pump price is unique to a particular firm, or if it is the result of market-wide changes in costs, says the report.
Consumers' incorrect expectations about prices result in prices staying well above what they would be if all consumers were fully informed about prices in the market, the study says.
For more information on the study, "Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market," go to www.ucei.org.
-Carole Donoghue, Oil Express, cdonoghue@opisnet.com