Gas Prices Continue Their Decline
Weak dollar is a large component of the gas price increases over the past 5 years (about 30% of it).
As more speculators pull out of the once hot speculative "oil" and "gas" commodities - the price continues to decline.
High oil/gas prices forced many Americans (and people in other countries) to be more energy conscious. With consumers reducing their energy consumption by 3-5% on average. Speculators were pushing prices higher and higher, but like the housing market, the market reached its peak and is now falling. Prices will continue to fall throughout August and you will see gas prices at the pump of close to $3/gallon. September will provide more opportunity for relief as speculators continue to bail out of the market - I would expect prices to bottom out around $2.75/gallon near the end of September, then move up modestly over the next 3-6 months to the $3.25 range and then hold there.
For those who simply look at the price of gas and wonder why is it so high? Well there are many factors that affect the price of gas in the US. You have the normal Supply/Demand curves that will shift prices based off of supply and demand - typically an increase in demand will cause an increase in price, while an increase in supply will cause a decrease in price. This probably does not answer your question though, since the supply has generally kept up with demand. What else is there? (this is not an all inclusive list, but is a list of major things that affect prices)
1. Speculation - meaning that people or businesses can buy oil/gas contracts, hold them and sell at a higher price (creates an artificial demand) - there are only a limited number of contracts sold, so if you buy a contract and someone needs a contract, they will most likely be willing to pay you more for it. It does not take a genius to figure this out - just look into history. For those 40 and over you probably remember the Silver Rush. For those who don't I would suggest to look back into the late 70's early 80's and what happened to Silver. Through commodites / futures trading I could drive up the price of Beef, simply by purchasing a large amount of contracts (if I had the money) and then I control the supply. A simple process and if enough investors do the same thing, you get wild fluctuations in price. Oh yes, pretty much the same as those real estate speculators who thought they could buy a house and then re-sell it like a commodity - you can see where that has gotten the US.
2. The value of our currency. Guess what? The value of the US Dollar sucks compared to most currencies. In my simple example I will use the Dollar vs. the Euro to show that the real price of oil/gas has not risen so much once you factor out the devaluation of the dollar. My point is - do things that make the dollar more valuable and you will see a drastic impact on oil/gas and other goods purchased from overseas. Around this time in 2003 gas was around $1.75 per gallon - the US dollar could buy .91 Euros. Today gas is around $4 per gallon and the US dollar can only buy .64 Euros. So, compared to the Euro the dollar lost around 30%. Using simple math and calculating the currency value differences, that makes the gas worth a 2003 equivalent of around $2.85. My point is that if the dollar had not lost so much value over the past 5 years, gas would only be around $2.85 per gallon. Sure, that is a hefty % per year, but far less than what you pay now. You want lower gas prices, then do things that incrase the value of the dollar; get the government to do things that incrase the value of the dollar. Bringing the value of the dollar back to where it was at this time in 2003 will reduce gas prices by 28% or so. So stop blaming oil companies (perhaps they are doing some gouging) and do something to increase the value of the dollar. In 2003 you could have bought a Canadian dollar for about 71 cents - now you will pay about 92 cents.
3. Interest rates
4. Cartel control (opec)
For those who support Obama, you should really listen to what he is saying - he blames the oil companies. Guess he should take some finance courses. As long as the dollar stays weak or gets weaker, you are not going to get any relief. Sorry to dissappoint you, but he has no clue (not that the competition does either), but no one is focusing on the fact that the dollar has lost so much value.
In my above scenario, if I had put $100k into Euros in 2003 rather than on a new house - I could exchange the money today and put $100k on a house at a lower cost and have over $40k left for gas. I did not, so I will not be taking a European vacation any time soon, because it costs too much - but I am sure traveling to the US has become more enticing for them.
If you look at the prices of goods that are purely produced in the US - they have not risen so much (as a percentge) as have goods produced overseas.
Is a weak dollar always bad? No - only bad for imports - great for exports. As an opportunist, now is the time to get into exports.
Weak dollar - means higher prices for imports - gas is an import, hence a higher price.
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