Sunday, December 07, 2008

Gasoline finally under $1.75, still further to fall

The retail price of gasoline finally fell to $1.75 on Saturday.

The AAA Daily Fuel Gauge Report national average retail price for a gallon of regular unleaded gasoline has fallen to $1.733, significantly less than half its peak price in July.

January RBOB unleaded gasoline futures are at $0.9449, indicating that retail prices are headed for $1.54 to $1.59 within a few weeks, about 15 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

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