Gasoline continuing to fall, but how much further?

With the price of crude oil seeming to stabilize in the low $50's, it would seem that the retail price of gasoline would be unlikely to fall a lot further. But, there are simply too many variables in the economic outlook that are pulling in different directions to clearly conclude any definitive direction in the price of commodities. Although I think it is very likely that the Obama administration will engineer a successful economic recovery, I also think that plenty of consumers and businesses are likely to take an "I'll believe it when I see it" attitude and continue to keep a tighter rein on their energy spending, if not tighter further. Sure, OPEC may cut back on output since demand is lower, but hedge funds and banks are more likely to have even less cash available to gamble on commodities speculation.

In any case, the price of retail gasoline continue to ratchet downwards, with the AAA Daily Fuel Gauge Report national average price falling to $1.835, significantly less than half its peak price in July.

December RBOB unleaded gasoline futures are at $1.1350, indicating that retail prices are headed for $1.73 to $1.78 within a few weeks, only about 5 cents below the current price level.

That "1" handle on the price will certainly add at least a modest degree of holiday cheer to the average consumer.

Energy commodities prices may begin to stabilize, especially if market participants begin to expect that Team Obama and massive fiscal stimulus are on the verge of turning the economy around. One scenario is that prices pop up on psychological expectations, and then reverse and head back down as people realize that even with massive stimulus a recovery will take some time.

The media is not giving these gasoline price declines much press, but all of this extra cash in the pockets of consumers will help to buoy consumer sentiment and domestic spending as well as boosting GDP (or at least limiting its decline) by reducing the subtraction due to imports of crude oil. Businesses and government will benefit from the steep price declines as well.

Some people are suggesting that we are seeing deflation, but the recent sharp declines on commodities-driven prices is simply the unwinding of the great speculative bubble in commodities of the past five years. If we see crude oil back down under $5 and gasoline under $1 and gold under $250, that would be an indication of true deflation. Besides, year-over-year core consumer prices rises are still above 2%. It takes more than a few months for there to be any sea-change in the price change trend. Currently, we are simply experiencing some welcome disinflation.

-- Jack Krupansky