Friday, November 21, 2008

Gasoline falls to $1.99 and headed lower

Finally! Gasoline is finally back down below $2, with a consumer-friendly "1" handle in the price.

The price of retail gasoline continue to ratchet downwards, with the AAA Daily Fuel Gauge Report average price falling to $1.989.

December RBOB unleaded gasoline futures are at $1.0510, indicating that retail prices are headed for $1.65 to $1.70 within a few weeks, about 30 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.

Gasoline has declined by $2.125 or -52% from its July 17, 2008 peak of $4.114. In other words, the price of gasoline is now less than half of its peak price in July.

And crude oil is now back down around $50 a barrel.

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

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