Sunday, May 20, 2007

More cheers for higher-than-sky-high gasoline prices, but they really are now likely to decline

I absolutely love these sky-high gasoline prices. They really are a great incentive for consumers to switch away form traveling so much and driving such gas guzzlers and to encourage entrepreneurs to pursue alternative energy and transport innovations. Alas, these sky-high prices are not likely to last much longer. Three weeks ago I had expected an imminent decline, but obviously I was too early in that call. I really do expect them to start declining soon, maybe as soon as the Memorial Day weekend "wave" approaches or passes.

The thing that is crystal clear is that despite all the chatter about demand and refinery outages, the bulk of the price rise has the wild speculation in wholesale gasoline futures. It is always dicey to try to predict the precise top of any speculative bubble, but that's the way it is with speculative bubbles, like the one we are in for a wide range of commodities. Even as we get closer to the "top", the spikes can become even sharper.

I will continue to remain a big fan of higher gasoline prices since they are a great economic signal to direct consumers to switch to more fuel-efficient transportation and to otherwise reduce their consumption of gasoline, as well as to incentivize development of alternative fuels.

That said, I strongly suspect that the recent run-up of gasoline prices has mostly run its course and we could see a decline over the next couple of months as speculators who had fueled the recent steep rise take profits and look for some other commodity price to manipulate.

Incidentally, here are the gasoline futures prices for the rest of the year as of the close on Friday:

  • June 2007: $2.4077
  • July 2007: $2.3112
  • August 2007: $2.2542
  • September 2007: $2.1862
  • October 2007: $2.0207
  • November 2007: $1.9412
  • December 2007: $1.9022

As you can see, even the speculators are speculating that prices will decline, with a 9.5-cent decline over the next month and a 50-cent decline by the end of the year. Be aware that these number are subject to radical and frequent change on a monthly, weekly, and even a daily basis.

-- Jack Krupansky

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