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Uptick in economy equals uptick in Gas Prices

March 8, 2009
By KEN BLACK, TIMES-REPUBLICAN

Gasoline is going to $5 per gallon. Oil is going to break the $200 per barrel mark.

Does anyone remember those dire predictions last summer? You remember, when you were forking over $4 for every gallon of gas you pumped into that SUV.

It was when gasoline stations stopped posting numbers as prices and simply put, in the price column on signs "ARM" and "LEG". To coin a new phrase, those weren't the good old days.

The reason for the sky-high prices was because the world was experiencing a shortage in the oil supply. That's what we were told.

We all know now that was hogwash, but is it going to help us not return to that same situation? Why did oil prices decrease and what will keep them down?

The Global Economy

So if the global economy falters, then oil prices will falter as well, the conventional wisdom states. In such cases, demand relaxes and supply does not slow down as quickly as demand.

That leads to oversaturation, which in turns leads to lower prices. That's simple economics.

We are seeing it at play right now. Or are we?

That may be one of the pressing questions.

Oil is not as simple as supply-and-demand economics. It is made more complicated by a group of speculators, who obviously have no idea what they are doing, or so it would seem.

How else can you explain that oil prices reach record highs in July, yet we have such an oversaturation a mere four months later that oil drops 60 percent or more and tankers stand offshore waiting to be emptied?

Things don't turn around that fast.

Of course, the world economy has slowed down (and high oil prices may have contributed greatly to that slowdown), but that can't explain all of what we are seeing.

After all, planes are still flying, cars are still running and factories are still humming. There's activity happening and it all requires energy.

Current Prices

Right now, speculators seem just as confused as the rest of us. They apparently, if you believe The Associated Press stories, take a close look at the economy each day and then determine what is going to happen.

If the economic news is not too gloomy, oil goes up 7 percent. If it is gloomy, it goes down 7 percent.

In the end, it remains right around $40 per barrel, which isn't bad considering it was $100 more per barrel last summer. As a way of comparison, my $1,000 round trip fuel bill for the road trip I took to Florida last June would now run me about $370.

People are feeling less of a strain because of gasoline prices and it may be making a positive impact on vehicle sales, though that category of the economy still looks fairly bleak.

Keeping It Down

Unfortunately, speculators, if they see the economy doing well may begin to drive the price of oil back up. This is even before there is a significant surge in demand.

In other words, in order to keep your job, you may need to pay $4 for gas. Either way, you are at somewhat of a disadvantage financially, (though it is understandable that buying $1.50 per gallon gas without a job is immensely difficult).

Breaking the link between oil and the economy may be fairly hard to do without regulatory reform of the oil industry and the trading side of the business. Both of those are very powerful lobbies and will likely not take too kindly to such a reformation taking place.

The sad reality is that, barring any unforeseen circumstances, an uptick in the economy will also likely mean an uptick in the price of gasoline. Whether we will get back to last year's summer prices is anyone's guess.

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Contact Ken Black at 641-753-6611 or kblack@timesrepublican.com

 
 

 

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