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0 Mar 1 2012 @ 10:50am by Matt Smith in Crude Oil, energy consulting, Global Energy

2 Bugbears, 5 Reasons, 1 Reality

This is my final rant about gasoline prices (for now), so please humor me. First up, I have two bugbears relating to current gasoline prices:

a) higher prices are hurting the economy, and
b) this isn’t a supply-driven issue (so there is no need to tap emergency reserves).

Higher prices are hurting the US economy, because every single cent rise in gasoline prices equates to crimping $1.4 billion in consumer spending (annualized). The relevance of this is even greater when you consider how consumer spending has a very different impact, depending on what it is spent on.

My point is this: the US imports approximately 50% of its oil. So if $1.4 billion of consumer spending is going on higher gasoline prices, approximately half of this is leaving the country to pay for the oil. However, if that $1.4 billion was available to be spent elsewhere, whether it be at  McDonalds, Target, or Redbox, closer to 100% of it would stay in the US economy (although, yes, some would be spent on foreign goods). So not only are higher gasoline prices crimping consumer spending, but they are directing money out of the US economy.

My second bugbear is that higher gasoline prices are not a supply-driven issue here in the US. Both last week’s post and some of the five reasons below highlight why – based on the fundamentals – prices should likely be falling. And this is why the government should not release emergency stocks from the Strategic Petroleum Reserve. It would be like putting a band-aid on your finger when you just grazed your knee – the emphasis is on the wrong place. Plus an emergency stock release would be political in nature, but not effective. Hark, reasons for weaker prices:  

1) MasterCard SpendingPulse shows that Americans have cut back on gasoline spending for the past 48 consecutive weeks.

“Gasoline demand continues to post steeper year-over-year declines as we near the end of February, in tandem with the steady rise in gasoline prices,” said John Gamel, gasoline analyst with MasterCard.

2) US gasoline stockpiles sit at 229.93 million barrels, above the five-year average and just shy of the levels of both last year and 2010. There is no supply shortage.

US gasoline inventories

3) US gasoline demand is currently down 6.7% on just last year.

4) Lower utility bills from lower natural gas prices are doing little to offset the impact of higher driving costs:

5) According to the EIA, recent product demand has hit a 13 year low.

So that leaves us with one reality. And that is gasoline prices are at a record level for this time of year, and this is, in large part, due to geopolitical tension with Iran.

EIA retail gasoline prices

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