Gas Price Drop Stalls

The AAA daily data on gas prices shows that  a gallon of regular has actually moved up slightly in the past week from $3.85 to $3.92. Gas prices usually lag oil by several weeks. But oil prices have moved up and down substantially most days over the past three weeks, from as low as $78 to to as high as $86. Refineries may try to pass along margin risk as they convert oil to gas in an environment when it is not clear in which direction oil will go.

It is also nearly the the end of summer. Gas consumption should rise as people travel for Labor Day. That will temporarily increase demand, and therefore prices.

There are several other reasons gas will probably remain high. A slow economy usually means demand for gas falls as consumers try to keep their living costs low. Gas station owners face a lower volume of business, a reason for them to hold prices as high as possible. There is an argument that they do this in any environment, but a drop in total income for stations makes it even more imperative that they maintain total revenue.

The demand for other forms of fuel, which compete with gas used in cars, also may not drop, or could tick higher. People will begin to travel for holidays within less than three months. The demand for jet fuel will rise. Winter is also about three months away, and with it, a need for heating oil.

Demand overseas, along with an OPEC commitment to keep supply tight, is also a factor in gas prices. China’s demand appears to have leveled off, but demand in Japan should increase as it works on infrastructure projects in the wake of the March earthquake. OPEC usually keeps production low as demand moves down. The cartel wants to keep the treasuries of it members full.

Gas may not move below $3.50 a gallon this year, as many have predicted. For now, the price is stubbornly high

Douglas A. McIntyre