Yes, the reference to Zapped in the title of this post does indeed refer to the 1982 Scott  Baio movie that probably won’t help Mr. Baio and fellow thespian costar Willie Aames get the Irving Thalberg Memorial Award at a future Academy Awards ceremony. Mr. Baio, as you recall, had high moments in his career  - - he was a central character in Happy Days and has his own show with Charles In Charge and subsequently dated Pamela Anderson, Erika Eleniak, Nicolette Sheridan, and Heather Locklear. I believe he is now married and doing reality shows that complete the arc of his work that began when he was one of the stud players on Battle of the Network Stars. Some reports say he has even appeared in scientology videos. More on Baio a bit later.

    If you’ve read my last three or four posts, you’ve noticed that I have been a non-believer in the possibility that 2009 events could again conspire to send U.S. fuel prices north of $3.00 gal this Summer, and this year, for that matter. But today, the average price of unleaded regular gasoline is at $2.639 gal (retail placards are always dressed to the nines), and that adds up to a percentage increase of 61.6% for the year.

   Below, I’ve inserted a chart of the state-by-state scorecard through Thursday, June 11, 2009. The 61.6% nationwide increase in the first 162 days of 2009 far and away exceeds any of the increases witnessed since the 70’s.  I would say that we haven’t seen this type of percentage increase since everybody was Kung Fu fighting, but that metaphor has been tainted this month.

  Anyway, here is a look at the state-by-state scorecard through yesterday.

   We’ve clearly surpassed the pricing levels that I forecast, and may flirt with $2.75 gal in the next ten days.

    That makes me nervous, partially because of the damage it might inflict on the fragile U.S. economy, but also because of the damage it may render to my career. I don’t wish my career to get zapped in the manner of Mr. Baio, and I certainly would face excommunication if I got involved in a scientology video.

    So, I choose to cling to the belief that we are close to a top on 2009 gasoline prices. Consumers are paying about $1.01-billion for gasoline each day, compared to about $600-million on New Year’s weekend, and down from a lofty $1.5-billion or more for the early period of summer 2008.  Those with vested interests can make these statistics do the Lambada, the Macarena, or the Funky Chicken  - - if you have an agenda you can make numbers dance to whatever tune you choose. A bullish gasoline trader would accurately note that Americans may pay about $15-billion less each month than they meted out in 2008 summer months. A bearish trader might counter that we will soon be paying about $12-billion more for gasoline each month than we paid in some of the past winter months, and note that unemployment has yet to find its crest.

Why Are Prices So High?

   Most of the explanations you’ll hear about the justification for $70+ crude or $2.75 gal retail gasoline are as indecipherable as the lyrics to “I Am, I Said” by Neil Diamond. 

 “I am," I said
To no one there
And no one heard at all
Not even the chair

   We know that Mr. Diamond meant to convey some deeper thoughts, but he simply wrested the title of most incomprehensible lyrics from the author of the songsmith who wrote McArthur Park.

   I’ll try to do a better job and break up the analysis into dynamics for crude, and dynamics for gasoline.

   Crude oil futures prices are a daily referendum on where 21^st century money managers see the global economy. The money managers include speculators - - those who move money in commodity pools or hedge funds - - -but the group also includes conservative investment funds. Commodities in general, and oil in particular, are perceived as a great investment this century. Some of the money that is parked in oil futures and options is very patient and has three, four, or five year time horizons, if not longer. Some estimates are that 1.7-billion more people on the globe will have income of $5,000-$20,000 in the next decade or so, matching the hourly income of some U.S. money managers, bankers, and Yankee third basemen.  Many of those billion plus folks will have to buy fuel for transportation.

   This money flow shouldn’t be underestimated. Imagine if a trillion dollars of money invested in stock funds suddenly moved into the oil market, with purchases of oil futures. Right now, there is about $7-billion more money invested or “bet” on a higher price outcome for oil futures than on a price dip.  That is certainly a huge driver in the 2009 performance.

    A soapbox moment:   I’ve said before that investment money coming into oil, and perhaps more importantly, into life blood commodities such as food, presents an ethical challenge for 21^st century governments. Those parties with a vested interest in growing futures and derivatives’ trade vociferously defend free markets.

    Speculators and investors get too much blame, I’ll agree. But imagine if we were trading insulin futures, and huge sums of money were getting wagered (invested) on a higher price outcome. There can be a legion of victims if unfettered money flow is allowed to be standard procedure. Capitalism has its imperfections in this age where billions of dollars can be transferred into assets with a few keystrokes.

   For a nice visual of the professional traders’ point of view on this issue, click on the following website: it is one of my favorites.   http://www.despair.com/corruption.html

The Gremlin  & Gremlins

   If money flow is the single biggest factor behind the 2009 crude price surge, what then has driven wholesale gasoline up by about 160 percent and created a 2009 surge in retail prices of 63 percent?

   Imagine that you worked at American Motors in 1970 when it launched the Gremlin, a vehicle generally recognized as one of the worst cars of all time - - some models had a denim interior, and I am not making that up.

  Fortunately, it was pretty clear from the get-go, that this car would be spurned by the American public. Production was cut, and ultimately the vehicle faded into automotive oblivion. But as a thought experiment, what if public demand for the car had suddenly exceeded the very low expectations of automakers?

    Low production would have certainly tightened supply. Tight supply would have driven up the sales’ price. If history had pursued this course, we might still be collecting massive amounts of denim lint from our dryers.

    What happened among U.S. gasoline producers (refiners) this year was similar to the hypothetical Gremlin scenario.  Refiners had incredibly low expectations for gasoline demand, and gasoline profit margins. They performed safe but very deliberate maintenance and also selectively took some production units down because executives perceived profits would be weak. Instead, we saw gasoline demand destruction ease – we’re using about as much gas as we did a year ago - - and gasoline profit margins recently swelled into the $14-$20 bbl range in many markets.

    For those of you who have ever struggled with sleep, it’s a phenomenon known as “paradoxical intention” (the more you try to fall asleep, the more you stay awake and vice versa).

   Additionally, lower case gremlins have surfaced at U.S. refineries in the form of mechanical problems, power outages, serious but not tragic fires, and the like. We saw a cluster of similar refinery gremlins in 2007. The problems were ultimately fixed, but not before gasoline margins and absolute prices rallied to record highs.

Nobody Asked Me But ….

    - Retail gasoline prices have now increased over 45 straight days. The record of 48 days for this century, was established in 2007 from January 30 through March 17. The 2007 record will fall, but I do not believe the streak will match the DiMaggio number of 56.

  -  Wholesale ethanol is considerably cheaper than wholesale gasoline in every U.S. bulk market, and I’m not even counting the ethanol subsidy when I make that statement. If you were an unscrupulous marketer, you could “cut” your expensive gasoline with cheaper ethanol, much like a heroin dealer cuts smack with quinine. Most U.S. gasoline has a 10% limit on ethanol content, although there are 85% mixtures that are known as E85 for consumption by flex fuel vehicles. On a BTU basis (there are less BTU’s in ethanol than in refinery-produced gasoline), E85 has always been more expensive than traditional gasoline. It is now cheaper than legacy gasoline at the pump in any markets.

  - The 2009 gasoline rally will end when there is “bullish” news - - in the form of a refinery event, a crude production incident, or a geopolitical storm.  When the market doesn’t react to such “news” with a price surge, it will signal that the party is over.

   Then again, I could be wrong, and headed toward a Scott Baio career arc.

    I’ll borrow and adjust some very comprehensible lyrics from the Shirelles, Dusty Springfield, and Van Morrison:

 “Mama said there’ll be months like this,

 There’ll be months like this my Mama said”