Gas Prices in Freefall

What a difference a month makes…

At the beginning of August, we were looking at gasoline prices in the area of $2.95 or so and were praying that nothing really bad happened weatherwise or geopolitically that would punt the price of gas up near $4/gallon. A tame start to the 2006 hurricane season and business-as-usual in the Middle East has meant that gas prices stayed stable throughout August, and now the start of the school year has brought another “American Driving Season” to a close. The arrival of Labor Day has usually brought reductions in gas prices, but nothing like what’s happening this year.

In the last 7-10 days, retail gas prices have been in free-fall. In my neck of the woods, 87-octane unleaded was selling for $2.95 a gallon, and this morning it’s down around $2.34; a drop of around 20 percent. So, what gives? Yes, we’ve been very lucky with the hurricanes this year, and yes, the Middle East hasn’t gone completely to hell in a handbasket, but gas consumption is still high, the housing market is still either correcting or imploding depending on your point of view, and the economy as a whole is giving mixed signals as to the fiscal health of the USA.

Being a cynical, pessimistic sort of guy, I’m inclined to believe that there’s some funny business going on. My take on things goes something like this:

  • This is an election year, and the specter of 9/11 seems to be losing a lot of it’s mojo for the Republican party. More Americans are questioning our involvement in Iraq, it’s tenuous ties to 9/11, and according to some major news outlets, even questioning who pulled off the 9/11 attacks. All of this adds up to bad news for the GOP and the neo-conservative theorists that have taken the party’s foreign policy platform hostage.
  • More reports keep popping up about how average Americans are losing the financial battle. Wage growth hasn’t kept pace with inflation, and overall more of us are in trouble with our mortgages, credit cards, and bills in general. This bodes ill for a retail sector that has both enjoyed increased sales over the last few years, and is nervously eyeing the start of the Christmas shopping season that can make or break many retail corporations’ yearly earnings.
  • Disregarding some irrational exuberance about a large oil find in the Gulf of Mexico that may or may not be big news, America’s addiction to oil continues to grow. As the global price of oil keeps ratcheting up, American retailers will be unable to hide the rise in the cost of imported goods. This will mean trouble for the Wal-Marts, Targets, Home Depots and other big box retailers whose just-in-time, warehouse-on-wheels, always low cost business model will be under increasing pressure as years go by.
  • While the price of oil has been wildly gyrating this year, there has been a lot less fluctuation in the prices of natural gas. We’ve been very lucky in that we’ve had two mild winters in a row, which has kept NG prices under control. That trend will not continue forever.

Based on these assumptions, I find it convenient that the price of gasoline is plummeting just in time for the mid-term elections, and just in time for Americans to feel a little better about their finances when retailers are starting their yearly Christmas shopping blitz (which seems to start earlier and earlier each year). If I were a betting man, I’d wager that the intent is to get Americans to blow as much cash as possible on Christmas gifts before the elections in November. Hurricanes and geopolitics permitting, we’ll have a few months of relative calm until control of Congress is decided one way or another. After that, rising heating costs and a possible US attack on Iran will re-shuffle America’s economic deck once again.

So, I plan on enjoying the next few months and hope you do likewise. Fall is my favorite time of the year weather-wise, and I plan on enjoying the time watching my kids destroy my carefully crafted leaf piles, picking some apples, and harvesting on the last of the fresh sweet corn for the year. If you have durable goods you’re looking to acquire in the next few years, I would look at getting them soon. Since most everything we rely on comes from overseas, the prices of those things will ultimately be trending upward in coming years, even if there’s some deflation in the short term.

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