Wednesday, November 7, 2007

The Dollar Goes Down Forcing Crude Oil, Eventually Coming To A Pump Near You

A declining dollar leads to increasing oil prices, which will eventually show up at the pump. Text in bold is my emphasis. From the WSJ:

Oil climbed $2.72 to $96.70 a barrel in New York Mercantile Exchange trading, bringing it closer to an inflation-adjusted high of $101.70 reached in April 1980. . . . . Gasoline is now expected to follow, potentially taking money out of the pockets of consumers at a time of weakening growth in consumer spending.

The average price of regular gasoline was $3.02 a gallon, according to AAA, formerly the American Automobile Association. That was up from $2.77 last month and from $2.20 a gallon a year ago. "Unfortunately between now and the end of the year gasoline prices will continue to rise if oil stays above $95 a barrel, and certainly if it goes above $100 a barrel," says Geoff Sundstrom, spokesman for the AAA.

Consumption data show U.S. consumers are beginning to respond, as consumption has dropped in recent weeks compared with a year ago. But economists say it would take a prolonged spell of high gasoline prices for consumers to react aggressively enough to affect prices.

"Right now people are saying 'Let's wait and see what happens. We like our big cars,'" says Carol Dahl, oil economist and professor at the Colorado School of Mines.

Now, demand is set to rise again for the holiday driving season. Refining margins lately have stabilized. High oil prices also have lingered long enough to work their way through the petroleum complex and show up at the pump. The reformulated-gasoline blendstock futures contract known as RBOB hit $2.4350 a gallon in New York Mercantile Exchange trading, up 5.39 cents a gallon, or 2.3%.

The Energy Information Administration upped its forecast for oil and gasoline prices. The agency now sees spot prices for West Texas Intermediate, a type of easy-to-refine crude, at an average of $86.93 a barrel in the fourth quarter, up from its previous estimate of $76.83 a barrel. It raised its forecast for retail gasoline prices by 5% to $2.90 a gallon for the same period, and expects an average price of $2.97 a gallon for next year.

Most American drivers can still afford to pay the higher prices, even if they don't like paying them. The sting of higher gas prices has been eroded somewhat over past decades as Americans are more affluent than in the past and cars have become more efficient. As a result, driving the same mile today takes up a smaller chunk of drivers' disposable income than in the past. According to data from the Bureau of Economic Analysis, gasoline expenditures now represent about 3.5% of the average American's personal disposable income, compared with 5% in 1981.

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