Gasoline prices have fallen dramatically and have further to fall

AAA publishes a web page called the Dail Fuel Guage Report, which gives average national gasoline prices every day ($2.74 for a gallon of regular unleaded on Sunday). Wholesale and retail gasoline prices have fallen dramatically over the fast few weeks. A gallon of retail regular unleaded gasoline is on average about 29 cents cheaper than the recent peak ($3.03). Not everyone has seen the same declines, yet, but further declines are in store since retail prices are still way out of line with wholesale prices which have fallen even more rapidly.

The price of a gallon of regular unleaded gasoline on NYMEX for delivery in October was priced at $1.71 on Friday. The traditional rule of thumb is that retail prices will converge at about 60 to 65 cents above the wholesale price. That means we should be looking at retail unleaded at $2.31 to $2.36, or about 38 to 43 cents below current retail prices.

Think of that 38 to 43-cent "gap" as the amount of "price gouging" that currently exists in retail markets.

Aren't you glad that your elected political leaders are not investigating how both wholesale and retail prices are set?

My view is that prices had been artificially pushed high due to a speculative frenzy of buying by parties who are not the true end users of the futures they were buying. A fair amount, but not all, of that speculative buying has now been "unwound". We could see further rises in speculative buying, especially whenever energy-related news seems bad, but my suspicion is that with interest rates up and super-safe T-bills now yielding over 5%, risky commodities trading and speculation has significantly less broad appeal, especially since a lot of "investors" have gotten burned badly in recent months after commodities had been touted as having "nowhere to go but up."

We still have a major portion of the Atlantic storm season in front of us and Katrina is still a fairly strong memory, but there isn't a lot of reason for energy prices to be rising at this juncture.

-- Jack Krupansky