To this day I can’t figure out why I hate paying for high gas prices at the pump. It’s not like I can’t afford to pay a little more to fill up. But I keep thinking of how many six-packs I could be buying if only gas prices hadn’t gone up so much this year.
I know, I know…comparing beer and gas is like cheese and chalk. No relationship there except in my mind…it just seems so avoidable.
If you’re as frustrated as I am over high gas prices, then you’d probably like to know if (1) the high prices this year were in any manner “avoidable,” and (2) what we can expect next year at the gas station.
If you want to know why you’re frustrated by gas prices, it’s because it’s no small expense. In fact one of your biggest expenses is gas. It represents a huge percentage of the US consumer’s annual spending budget.
Each US household will have spent an average of $4,155 on gasoline this year. That’s 8.4% of an average family’s income.
And although pump prices have been falling, consumers will have spent more money than ever on gas this year. Based on recent demand trends, consumers will have spent nearly $481 billion on gas in 2011 vs. $389 billion last year.
That’s almost a 24% increase over last year.
This seems a little crazy since crude oil futures (in West Texas Intermediate or WTI prices) are up only about 5% this year. I bet you suspect this but I’ll confirm it to you: Gasoline RBOB futures (Reformulated Gasoline Blendstock for Oxygen Blending) are up almost 11%, twice as much as crude’s rise in 2011.
So higher gas prices certainly didn’t mean less driving this year. But if they go much higher, Americans will begin to think twice about packing the kids into the car and going to see the grandparents a few hours away.
When Will Gas’s Downtrend End?
Gas prices have been trending down since peaking earlier this year. At the same time gasoline inventories have been getting bigger. As you probably know, inventory build-ups contribute to lower prices.
But just this past week all that ended. The Department of Energy (DOE) reported the largest weekly draw since February 2001 in crude oil stocks. Gasoline supplies also unexpectedly declined, falling to 412,000 barrels versus the expectation of a 1.5 million barrel build.
This means you can expect gas prices to go higher.
Now, typically, gasoline prices are closely tied to crude oil, but they are also subject to other factors. As you can see from the chart below, gas prices and crude oil prices were moving in the same direction until October when oil prices rose and gas prices continued lower.
Historically, there is often a lag before crude oil price changes are reflected in retail gasoline prices.
Other factors that can also affect this correlation are: seasonal factors, changes in supply or demand for gasoline, refinery outage and transportation problems.
But the biggest reason why gas prices have dropped in the last two months (even though the price of crude has gone up) is excess supply.
I don’t expect big supplies to last much longer. The US’s large refining base, which is located near some of the busiest ports in the world, will see an increase in gasoline exports over the next few years.
Already, the US has become a net exporter of petroleum products. It’s the first time it had happened in in 62 years! And you can thank increased demand from emerging markets and a falloff in domestic activity for shifting the tide.
According to data from the DOE the US took in 689.4 million barrels of gasoline, diesel and other oil-based fuels over the first 9 months of the year – while sending 753.4 million barrels overseas.
Emerging markets demand has doubled world oil consumption in five years. As these economies grow, so do their income level. There’s no reason why emerging markets won’t keep increasing their demand next year and beyond.
Moreover, Japan’s rebound from the earthquake should also help its recovering industrial and auto production next year and feed into increasing demand for gasoline products.
China will also soak up global supply growth, keeping the supply-demand balance tight and oil prices elevated over the next few years.
I see other developments also impacting gasoline prices next year…
– The US Economy. There are more positive economic numbers beginning to trickle out of the US. It’s no gimme but the tide seems to be turning.
– Europe takes steps to fix their debt problems. I’m more optimistic that some kind of solution can eventually be worked out in Europe. It was good to see the ECB lending European banks a record amount of money in the form of three-year loans, which will help avoid a liquidity squeeze.
– Sanctions against Iran from Europe and the US. While it is unlikely that an all-out oil export ban on Iran would be approved by China and Russia, the threat of one will likely prop up energy prices. By the way, China and India get about 11% of their imported crude oil from Iran.
Higher levels of gasoline inventories are still being worked off, but with increasing demand from the emerging markets I expect gas prices to rebound from these current levels during the first half of next year. So I don’t expect much relief at the pumps next year.
We’re a little early to take advantage of rising gas prices. But I expect prices to start moving higher in the beginning of next year. So hold off for now, but when the timing is right you will be able to take advantage via the US Gasoline Fund (UGA).
Do you think gas prices will go up or down next year? What are the most important factors impacting gas prices?