I have been steadfast in predicting that U.S. gasoline prices would peak between $3.50 gal and $3.75 gal this spring. Is this my Spiderman or Waterloo moment? Retail prices today hit $3.739 gal and we have yet to see dozens of states transition from less expensive winter blends of gas to the more expensive summer blends. That action in and of itself will push prices up another 5-10cts gal.
Accordingly, I am taking a mulligan on my very temperate, very thoughtful, consistent and unemotional previous forecast that might prove to be insufficient. I “misunderestimated” the oil market’s mojo. I am now expecting that retail gasoline prices will peak between $3.75 gal and $4.00 gal. We will see a $3.75 gal average surpassed this weekend.
The $4.00 gal number is somewhat magical to the media, and I maintain my view that if the U.S. economy sees $4.00 gal for an extended period of time, there will be some dire consequences for the consumer economy. There are also consequences for yours truly - - if I am this wrong about something that I’ve spent 35 years analyzing, my career may take a turn similar to the move David Soul followed when he switched from acting to music. Don’t give up on me baby.
The recent strength in prices has less to do with Moammar Quadafi, or supply and demand metrics, or MENA (Middle East North Africa) unrest, and is mostly attributable to money flow. In a moment, I’ll elaborate, but first, let’s examine the fuel price box score.
Gasoline prices averaged $3.5326 gal in March 2011, more than 75cts gal above the March 2010 average; about $1.58 gal above the March 2009 number; and $2.01 gal above the average tally for gasoline in the third month of the new millennium (we averaged just $1.5183 gal in March 2000).
The numbers can fade to an abstract background if not given proper context. Motorists spent about $41.4-billion last month on gasoline. Until now, Americans have never meted out more than $40-billion in a month that was not part of the Great Recession. We paid nearly $50-billion for motor fuel back in July 2008, but we now know that the Great Recession formally began in December 2007 and ended some time in mid-2009. We’ve never paid this much in a non-recessionary month.
At this moment, we are on a path that will take April expenses to about $42.5-billion, and that’s based on a $3.75 gal average and just 30 days. A May 2011 average price of $4.00 gal, with 31 days of say 380-million gallons per day of demand would calculate to about $47-billion. As recently as 2009, motorists paid as little as $20-billion to $25-billion per month for gasoline.
Gasoline Expenses by Month - - Last 39 Months*
(in billions of dollars per month)
2008 2009 2010 2011
Jan. $36.5 $20.6 $31.1 $35.8
Feb. $32.1 $20.2 $27.1 $32.3
Mar. $38.5 $23.0 $23.0 $41.6
Apr. $40.0 $23.4 $32.9 ? ? ?
May $45.7 $20.6 $34.0
June $47.4 $31.2 $31.7
July $49.4 $30.3 $33.3
Aug $46.3 $31.1 $33.5
Sept $42.7 $29.5 $31.4
Oct $35.6 $30.2 $32.8
Nov $24.0 $29.9 $32.5
Dec $19.7 $30.6 $35.5
*These are real numbers and not simply pulled out of my keister.
We are seeing considerable “demand destruction” with fuel prices in the $3.75 gal range and with commercial prices above $4 gal for diesel. These high payments will become manifest if not dominant in soon-to-be-issued consumer confidence measurements, and much higher headline inflation indices. When those numbers are published, a general dour sense of misery, similar to the way Staten Island people feel much of the year will become apparent.
Randy Newman had it right . . . It’s Money That Matters
When I was a young boy, maybe thirteen,
I took a hard look around me and asked what does it mean?
So I talked to my father, and he didn’t know,
And I talked to my friend and he didn’t know,
And I talked to my brother and he didn’t know,
And I talked to everybody that I knew,
It’s money that matters,
Now you know that it’s true,
It’s money that matters,
Whatever you do.
Mr. Newman’s lyrics really should provide and epiphanous awakening for regulators, analysts, oil marketers, and consumers. Moammar Quadafi, violence in other MENA countries, and the metrics of supply and demand have all exerted a limited impact on oil prices these days. The much greater driver has been money flow and the velocity with which money has cascaded (largely unfettered) into most commodities, and particularly into WTI and Brent crude oil futures.
This is not an indictment of futures’ exchanges. They have a role, given the proper regulation, oversight, traffic signals, and speed limits. In his address on energy policy, President Obama didn’t expel one breath talking about investment money flowing into oil and other life blood commodities like corn. But consider:
Speculative and investment interests have increased their bets on a higher price outcome for crude (they’re long) to where there is about $40-billion to $50-billion more money from funds that is on the buy side of the market. There are about ten times as many futures and derivatives’ contracts on exchanges now, as compared with 2003. This is not something sinister or collusive -- it reflects the prevalent (if flawed) wisdom among money managers that oil and many other natural resource futures’ contracts can only move higher in the months and years ahead. Meanwhile, oil producers and refiners are forsaking sales into the market because they don’t want to get beat up in the boardroom when their profits are hurt by “hedging losses.”
Simply put, an unfettered market can use some fettering. Free markets might work wonderfully in theory, and terribly restrictive markets are loathsome. However, if money is allowed to move unimpeded, unsupervised, and unfettered into oil and other commodities, then freedom is just another word for nothing left to lose.
If anyone doubts the power of the powerful financial interests with incredibly deep pockets, just take a look at the information published this week by NACS - - the National Association for Convenience and Fuel Retailing. In the U.S., convenience stores sold about $576-billion worth of merchandise last year -- give or take a Slim Jim, energy drink, a Slushee or two - - and managed to command a record pretax profit of $6.5-billion. But the financial companies that simply managed the credit and debit card fees brought in close to $9-billion on those same c-store sales. Credit card fees added about 4.7cts gal to every gallon sold at c-stores last year, and the fees are probably in the 6-7cts gal range currently.
Where to from here?
The odds of average gasoline prices surpassing $3.75 gal are very favorable. The odds of seeing a $4 gal national average are probably just under 50-50; and the chances of surpassing the all time peak of $4.11 gal witnessed on July 17, 2008 are probably about 40%. The odds of $5 gal gasoline this year are similar to the odds that Sarah Jessica Parker might fetch if she runs in the Preakness.
Right now, markets are getting driven by money, momentum, and by the incredibly reliable historical template that tends to drive prices higher in the first half of April. Simply put, many speculators chase crude and gasoline higher in April, because of a prior history that money invested in oil and gasoline on April 1, gets a strong return by say, April 20. Gasoline always moves higher in early April, just as Cubs fans momentarily wonder if this is the year that their baseball team wins the World Series.
After April, things could get very interesting. Our own internal surveys suggest that gasoline demand is down about 3% nationwide, and that year-on-year drop could widen as prices continue to move higher.
The most common time for a top in the gasoline futures market is around Cinco de Mayo. The average wholesale decline after that point is in the neighborhood of 18 percent.
It could be hasta la vista baby for anything close to $4 gal gasoline after that holiday.