Posted in: Gas Prices,
by Patrick DeHaan on Dec 17, 2010 11:45 AM
Just as the Dow hit a two year high this morning, retail gasoline prices are climbing ever so close to the magical $3/gallon mark. For gasoline prices, it would be the first time the national average has breached $3/gal since October, 2008.
Is it a coincidence that gasoline prices have climbed to similar highs when compared to the Dow Jones Average? Not at all. As goes the economy, as goes gasoline prices. Let me explain for those who aren't making the connection: as the economy improves or performs well, people feel better, are generally doing acceptably, and consume more gasoline in their pursuit of happiness- be it more shopping, vacations, or just driving to be social. The connection is remarkable.
While unemployment numbers have remained high, demand for petroleum products has shown a distinct improvement over last year. For example, comparing last week to the same time in 2009, demand for petroleum was up 700,000 barrels per day, or nearly 4%. While that might not seem significant- the reason for the increase is significant- people are consuming more.
So while supply is still somewhat healthy, demand continues to rise- catching the eyes of many, including speculators hoping to turn a profit buying today and selling down the road without ever having to take delivery of oil.
Rising gas prices are an unfortunate sign of economy recovery... and while you may not be seeing much of an improvement in your personal finances, some people are, and those people are using more petroleum products in their daily lives, driving demand up.
When demand rises, there are other issues that also push prices up. Rising demand means less spare capacity, it also means drops in supply. Last week, we saw a huge 10 million barrel decline in oil inventories, the largest single week drop in over five years. Meanwhile, OPEC and Co. are becoming more satisfied with high oil prices, which means OPEC countries have more money to spend. You'll find that as oil prices rise, OPEC will move slowly and cautiously to pad their bottom line.
So for a great indicator on where retail prices are going, not only check back here for the latest, but keep an eye on the Dow Jones Average.