Gasoline Prices Heading Higher ???

Well here we are, staring at $100 a barrel oil prices.


The pundits tell us that the price levels reached during the 1974 oil embargo and again in January 1981 equates to about $93 in present day dollars. We are likely to see the market trade above this level next week.


Conventional wisdom would dictate that we will be seeing all-time record prices at the pump very soon, as well right??? After all, when crude was trading at $60 a barrel earlier this summer, my fellow Chicagoans and I were paying $3.30+ for a gallon of get-me-there.


The Conventional Wisdom Inverter speculates that it's just not that simple. CWI thinks that any oil price increase will not be translated into higher gasoline prices, if at all, until well after the Christmas shopping season is over.

Here's why. American consumers get irrationally emotional about the pump price of a gallon of gasoline. So much so that they will sit on their wallets and not buy other things when they feel the pinch of paying over $50 to fill the tank.

That wouldn't be good heading into the Christmas shopping season. Especially when we are being surrounded by the ingredients for an economic Perfect Storm. Subprime mortgage market. Record real estate foreclosures. Rising credit card delinquencies & defaults. Credit crunch. Falling real estate prices. A very weak U.S. Dollar, especially against the Euro.

A weak dollar.....and yet we saw the Fed drop short term rates 50 basis points a couple of weeks ago which will only invite more dollar weakness. The Fed knows. The Fed knows what CWI has also figured out. We are at the proverbial Tipping Point.

Higher gasoline prices in the weeks ahead would mean consumers will have to pay alot more to fill their tanks just as they are heading en mass to the shopping malls to decide whether Uncle Frank will get that really nice sweater from Macy's or the bottle of cologne that's on sale at Walmart.

If gas is at $3.30 -$3.50 a gallon, I'm afraid Uncle Frank gets the cologne. Less consumer spending = weak retail sales during Christmas, which will lead to layoffs early next year, which effects consumer confidence and wah lah we are sliding down that slippery slope into recession.

And it could be a bad one.

We want those consumers at the mall. You need those consumers on the wall, I mean mall.
Oh if Santa could just insure stable gasoline prices for the next several months, we could have our cake and eat it too. Well CWI doesn't believe in Santa or that American gasoline prices are set by the free market.

Whether or not you believe as we do - that gasoline prices are "managed" in the U.S. almost as if it was a variable tax - we consumers get to dodge the bullet this time. Big Oil and Big Brother will see to that. Fortunately, we only get hammered with higher prices when it is relatively safe to do so and when there are convenient reasons lying around to explain it - like hurricane season (or my favorite, the mysterious annual refinery fire/explosion that we never seem to be able to see news footage of).

It is just not safe for the economy to have higher gasoline prices in November and December and January - so we won't. It's just that simple.

I can hear my old Economics Professor now, "Didn't you learn anything while you were here?!
The free market will set the price of gasoline (tho there is some price inelasticity) based on the law of supply and demand and the interplay of buyers and sellers acting in their own best interests. The invisible hand!!"

Oh but Professor, you also made me learn about monopolies and oligopolies and cartels. And in my lifetime since college, that is what the U.S. gasoline market has evolved to - a few big players controlling the action....pricing power concentrated in fewer and fewer hands.

Heck if OPEC can successfully manipulate the world price of oil to all countries, certainly the American Oil giants and their refining arms can control the price of gas in a single country....ours!

Perhaps this is just the inaugural ramblings of a newbee blogger. I know this type of forum allows me to anonymously voice a position I would never admit to around the water cooler. I've kind of loosely connected alot of dots and tried to see in through the looking glass. Or maybe, just maybe I've managed to turn the wisdom of conventional thinking on it's head. So for now I remain CWI, the Conventional Wisdom Inverter!