When will gas cost less than $1.99 a gallon?

A few months ago I made a bet with my wife. If regular unleaded gasoline in Eastern Massachusetts drops below $1.99 a gallon by February, she buys me a latte. If it stays above $1.99, I buy her one. This bet comes to mind as I note that the price of oil fell 4.4% to $59.66 a barrel in London trading -- that's down 59% from its July high of $147. Why the fall?

I think there are two factors -- one having to do with trading and the other with supply and demand for oil. As I posted, 81% of oil trades earlier in the year came from speculators buying oil -- and other commodities -- while shorting the dollar. For some reason, that ended in July and the dollar has since risen in value by 20% from about $1.60/euro to $1.2748. Why? It may be partly because the world thinks that U.S. Treasury bonds are the safest investment in the middle of this global financial crisis. Since oil is traded in dollars, a stronger dollar drives down the price per barrel.

But there is also a supply and demand reason. With the global financial and economic crisis, demand is down. And despite promises by OPEC to reduce production, we may see that supply has risen when reports come out later this week. Specifically, crude oil stocks could be up 800,000 million barrels last week, distillate stocks should rise by 500,000 million barrels and gasoline by 800,000 million-barrels.

I am not expecting a big change in these factors -- and am looking forward to that latte. But even more than that, I will enjoy giving less money to people who don't like us very much.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.