Gas Prices: Up or Down?

| July 18, 2006

As I’ve noted before, Robert Samuelson is one of my favorite commentators. He is fair, intellectually honest, tends to focus on what is rather than what should be, and has no particular agenda that I can discern — other than that others take the same approach. Over at Real Clear Politics he talks about the potential economic impact of oil prices, should they continue to rise:

Oil markets are operating on fear. The gap between demand and productive capacity is tiny, perhaps 1 million or 2 million barrels a day. Because oil demand is what economists call “inelastic” (meaning that consumers see fuel as essential and curb their buying only slightly as prices rise), even modest threats to supply can create big price increases. Rebels in Nigeria have cut that country’s sales by about 600,000 barrels a day, says Mary Novak of Global Insight. Prices have risen. The Middle East fighting creates many grim, if long-shot, possibilities: Iran might curb output to put pressure on Israel; terrorists might block tankers from using the Strait of Hormuz; the Israelis might bomb Iran….

But until now, the economic impact has been muted. Why? Three reasons stand out.

First, adjusted for inflation, oil and gasoline prices have remained below previous peaks. This may no longer be true: The earlier highs occurred in 1980 and 1981, when gasoline averaged almost $3 a gallon (in 2005 “constant” dollars); that’s roughly where prices are today. Second, gasoline spending has represented a smaller share of household budgets because over the years Americans have gotten richer. Although that’s still true, the gap is shrinking. In 1980 and 1981, gasoline spending equaled 4.3 percent of disposable personal income. In 2002, that was about 2.1 percent; now it’s 3.7 percent. Finally, most businesses — oil companies obviously excepted — haven’t passed their higher energy costs along in prices. Some economists worry this may soon happen….

Go read the entire article for his cogent analysis.

While Samuelson is raising at least a yellow caution flag on oil prices, Larry Kudrow over at the National Review Online wrote last month about what he claims is an ever-growing, market-driven suplus in oil for a potential dramatic drop in gas prices this fall:

The Energy Department just announced that crude oil supplies rose 1.4 million barrels to 347.1 million for the week ended June 16. Analysts had been expecting a drawdown, so this news caught them by surprise. More, crude oil supplies in the U.S. are now at their highest levels since May 1998, when oil was trading around $15 a barrel. Add in the fact that Canadian oil inventories are fully stocked, and the more imminent reality is of a sizable oil-price decrease — not a huge increase.

Recently I interviewed four oil-tanker executives who control a combined 85 percent of the oil coming into the United States. They confirmed market rumors that the amount of oil being stored on large carriers on the high seas is abnormally high. One of the CEOs even predicted the possibility of $40 to $50 oil in the next 6 to 12 months. In another interview, Chevron CEO David O’Reilly suggested that gasoline and energy demands have flattened in the U.S., and may be showing signs of decline.

Prince Turki can threaten $200 oil all he wants, but we may instead be looking at a downward correction that will have oil prices dropping more than anyone imagines possible. Supplies are at their highest levels in eight years, while demand appears to be falling, or at least leveling off. Should a significant price correction be in the offing, stock markets and the economy will cheer.

Check back in a few months, and we’ll see who had the better analysis ..bruce..

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Category: Geopolitics, Main

About the Author ()

Webster is Principal and Founder at Bruce F. Webster & Associates, as well as an Adjunct Professor of Computer Science at Brigham Young University. He works with organizations to help them with troubled or failed information technology (IT) projects. He has also worked in several dozen legal cases as a consultant and as a testifying expert, both in the United States and Japan. He can be reached at, or you can follow him on Twitter as @bfwebster.

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