U.S. gasoline prices average $2.691 gal this morning, down from the 2009 record high of $2.6952 gal reached on October 30. The Devil’s Night high topped the previous June 21, 2009 high by less than a quarter of a cent, and values may move sideways through this week until a clearer picture of the economic backdrop emerges.

   I’ve suggested before that current oil prices are bubbly, or excessive. There’s a tendency among oil analysts to gravitate to hyperbole --  prices are either ready to soar, or primed for a plunge, one might think in reading various commentaries. Excessive predictions get attention.

   Back in the Spring of 2008, I characterized oil as “morbidly obese.”  That level of bubbly excess may not be approached again in this decade. Crude oil prices of around $80 bbl and U.S. retail gasoline prices of $2.70 gal are rotund, or portly, or even slovenly, but not extreme. Think Al Gore and Rush Limbaugh, as opposed to the Notorious BIG.

 A Thought Experiment For Armchair Economists

  It’s reasonable to assume that gasoline demand could be about 2.5% above November, December, and January levels a year ago. The weak year-ago demand numbers reflected a trough in consumption associated with fear of economic collapse. Spirits should be higher this year, for people not on the unemployment rolls, or Phillies’ fans.

   Here’s what you get, if you plug in reasonable demand expectations with possible price scenarios for retail prices. Economists who paid little attention to popular music in their youth might be prone to quote the number one single of February 1967 which was Kind of a Drag (written by the Buckinghams, and currently getting plugged ad nauseam by Time Life infomercials).

   First consider: the historical record shows that Americans paid about $23.8-billion for their motor fuel in November 2008, based on an average price of $2.119 gal. In December 2008, the monthly payment moved down to just $18.2-billion (average retail price of $1.686 gal), and in January 2009, a still very rugged economic backdrop and low demand  resulted in a $20.2-billion obligation ($1.787 gal). The total bill for the three months was approximately $62.2-billion.

   Based on reasonable demand projections, an average retail price of $2.75 gal  over the next three months would add up to a total bill of about $95.6-billion, or more than $33-billion above the previous year.  An average price of $2.50 gal would equate to expenses of about $86.8-billion. A more temperate price average of $2.25 gal would push the three month tally to $78.3-billion. 

   So, under almost any scenario, we are looking at anywhere from $16.1-billion to $33.4-billion in extra expenses for gasoline in November, December and January. I didn’t even bother with a $3.00 gal price projection scenario, but that more “excessive” price would push expenses up to about $104.3-billion for the three month period, and that would be more than $40-billion above the year ago outlay.

  This morning, we are paying about $1.03-billion per day for gasoline. We paid about $920-million on this day one year ago, but that per diem charge remained in freefall until late December.

   Only one time in recent history has there been a year-on-year price increase in the realm of the $250-million per day range that will be witnessed soon. That would be 2007 when asset inflation was on its relentless march higher and retail gasoline averaged over $3.00 gal in November.

A Word About Fundamentals  . . .

   Money was the “fundamental” that lifted crude oil prices in the 2007-2008 oil price spike. Hedge funds, banks, ETF’s and other financial companies rushed into mostly long positions in crude and products’ futures on the expectation that late decade demand increases would outpace supply capability. The exit of that money due to financial deleveraging probably contributed as much to last winter’s declines as petroleum demand destruction around the globe.

   Much of the money has returned. Statistics for futures & options’ open interest --  which measures positions of buyers and sellers (if I sell a futures contract to Paris Hilton, there is a buyer and a seller and an open interest of two) have soared.

   Since May, the total open interest has increased by more than 655,000 contracts representing another 655-million hypothetical barrels of petroleum in play. Most of that increase is in options, and especially in crude options. Much of the financial exposure is on the “long” side - - betting that oil prices will rise, or that oil is a wonderful hedge against the weak dollar or inflation.

   You’ll also notice that a great deal of the new participation has arrived since September. I would suggest that financial participants no longer believe that Congress or the Commodities Futures’ Trading Commission will take extraordinary steps to rein in speculation, or limit positions. So, oil is back to becoming the asset that portfolio managers use to make massive multimillion dollar bets on a weak dollar or a strong economic recovery.

   In the U.S., there is no hint from petroleum consumption numbers that a robust economic recovery is on the horizon. Last week’s Energy Information Administration (EIA) report showed total petroleum demand at 18.523-million b/d. That is down by  590,000 b/d from last year and by nearly 2-million b/d from same week 2007.