Friday, March 4, 2011

HOW HIGH WILL GASOLINE PRICES GO?

by Cullen Roche

While the equity markets have taken some recent relief in last month’s economic data gasoline prices have continued to surge.  The most recent national gas price is $3.44.  This is up 10% from just 3 weeks ago when prices were $3.10. Prices are still 20% from their 2008 highs, however, the seasonal trends look very similar.  If one looks back at recent trends the seasonality is quite clear – gas prices always surge in the first half of the year.  Since 2005 gasoline prices have surged an average of 41% during the first two quarters of the year.

If prices were to surge even 30% from their January low prices would hit $3.80 by the middle of the summer.  If prices were to match their 2008 increase Americans will be staring at $4 gasoline and an equivalent of wiping out the entirety of the stimulative effects of the Obama tax cut.  I don’t think these are unreasonable estimates given the fact that the prior year rallies have lacked the two powerful exogenous forces that are currently driving prices – the conflict in the Middle East and the speculative aspects associated with QE2.  In fact, it would not be at all unreasonable to estimate that these prices are on the low end of potential price increases.   I think analysts are substantially underestimating the potential for higher gasoline prices and the impact on consumer spending.  This likely isn’t enough to derail the recovery, but it’s one risk markets are eager to overlook.

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