Rabu, 09 Mei 2012

Energy price update

One month ago, I noted in a post that "the threat of higher gasoline prices is receding." Some readers as well as some economists and analysts noted at the time that energy prices appeared to be tracking the strength of the economy, and that therefore they would rise if the economy improved, and fall if the economy got weaker. My point, in contrast, was that higher gasoline prices were not necessarily a reason to worry about the economy, and in any event, internal market dynamics were already pointing to a decline in gasoline prices. I'm not sure if anyone can claim victory here (are gasoline prices driving the economy, or is the economy driving gasoline prices?), but the issue is important enough to warrant posting some updated charts.

As this first chart shows, gasoline prices at the pump peaked in early April at $3.94/gal. and have fallen since to $3.75, according to the folks at the Automobile Club.

This chart compares the price of gasoline futures (white line) with gasoline prices at the pump (orange line). My point a month ago was that pump prices naturally lag futures prices, and the decline in futures prices was already pointing to declining pump prices. That continues to be the case, so pump prices could fall another 15-20 cents in the next few weeks.

This chart shows the tight correlation between gasoline futures prices and crude oil futures prices. A month ago I noted that gasoline prices were unusually high relative to crude prices, and that this also argued for lower gasoline prices. That is still the case today. So once again, I think the conclusion is that "since pump prices are high relative to wholesale prices, and wholesale prices are high relative to crude prices, it is reasonable to think that pump prices are at least unlikely to rise further, absent a significant increase in crude prices, and could well decline."

In conclusion, to the extent that expensive energy represents a headwind to growth, this is one more reason to not worry about the U.S. economy suffering a relapse.

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