Sunday, June 03, 2007

Higher-than-sky-high gasoline prices are finally drifting back down to Earth

Speculators pushed wholesale gasoline prices (and hence retail prices) up through the sky in advance of the Memorial Day weekend which marks the beginning of the Summer "driving season", a trading phenomenon known as "frontrunning." Then, just as real consumers were really increasing demand, the Thursday before the big weekend, speculators jumped ship and began a feverish sell-off of wholesale gasoline futures, triggering a decline of retail prices as well. Retail prices haven't caught up with the decline in wholesale prices, but the mere fact that retail prices have declined at all since before the Memorial Day weekend is a stark reminder of the extent to which commodity prices are being manipulated by speculators out of all perspective with actual retail demand relative to actual supply.

According to AAA, the average for retail gasoline has declined from a peak of $3.227 on Wednesday, May 23, 2007 to $3.164 yesterday, a decline of 6.3 cents. Wholesale prices have fallen about 15 cents.

It is still possible that we could see another spike this summer, but the odds against it are rising.

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. A month ago I had expected an imminent decline, but obviously I was too early in that call.

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 wholesale gasoline futures prices for the rest of the year as of the close on Friday:

  • June 2007: $2.2512 (ceased trading on Thursday)
  • July 2007: $2.2446
  • August 2007: $2.1956
  • September 2007: $2.1366
  • October 2007: $1.9761
  • November 2007: $1.9121
  • December 2007: $1.8901

As you can see, even the speculators are speculating that prices will decline, with a 5-cent decline over the next month and a 35-cent decline by the end of the year. Add 60 to 65 cents to those wholesale prices to get equilibrium retail prices (before the gouging premium or state and local premiums are added.) 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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