U.S. gasoline, $4.11 in July, now averages $1.75, Lundberg Survey says

Posted Dec 8th 2008 1:51PM by Joseph Lazzaro
Filed under: International Markets, Forecasts, Commodities, Oil, Recession

The fact that gasoline prices have risen, then fallen, is nothing new, so says energy trader Jim Dietz.

Gasoline prices have risen and fallen - - or exhibited cyclicality, in traderspeak - - for decades.

Consider:

1973-74 Arab oil embargo: Oil Shock I - - U.S. gasoline prices double from about 35 cents per gallon to about 60 cents per gallon. (Or from $1.50 to $2.50 per gallon in today's dollars.) U.S. recession ensues. Over the next six years prices decline to about $1.80 in today's dollars.

1979-80 Iranian Revolution: Oil Shock II - - U.S. gasoline prices double from about 70 cents per gallon to $1.45. (Or from about $2.00 to $3.50 in today's dollars. U.S. recession ensues. Over the next 10 years prices decline to about $1.60 in today's dollars.

What is new about this cycle, Oil Shock III, is the speed of gasoline's price plunge: never have gasoline prices plummeted so much, so quickly, Dietz said.

"After rising to what had been historically high levels of about $2.50 per gallon in 2006, prices rocketed up to ridiculous levels above $4 per gallon this summer in what we now know was a speculative bubble, a lot of it fed by leverage-amplified hedge and investment funds," Dietz said. "They distorted the market, no question."

Much of that leverage is now gone, Dietz said, and so is the gasoline bubble, and the oil bubble. What no one expected was the speed of the price decline, following the removal of the leverage, he said. Many expected a gradually deflating of prices. Wrong model: prices have collapsed.

The average price for unleaded gasoline, once $4.11 in July, had dropped to $1.75 as of December 5, according to the Lundberg Survey, CNNMoney.com reported Monday. The price of gasoline has dropped every day, basically, for three months.

"We've seen a 100% market reversal. It's been the biggest change in psychology in less than a year that I've ever seen in more than 20 years of trading. It's unprecedented," Dietz said. "A year ago, we were concerned about spot shortages for oil and there was talk of oil heading to $200 or $250 per barrel. Today, oil inventories are rising in nearly every region of the world, and we're likely to test $30 per barrel in 2009." Dietz added he was currently short both unleaded gasoline and oil, with monthly contracts.

Dietz said he expects the average U.S. unleaded gasoline price to bottom at / near $1.50, although $1.25 is not out of the question.

Gasoline / Oil Analysis: What would mark an end to gasoline's price decline? An end to job lay-offs and an uptrend in U.S. GDP growth, Dietz said. However, many economists do not expect the U.S. recovery to start before Q3 2009, at the earliest.

Tags: gasoline prices, gdp, inthenews, Lundberg Survey, oil bubble, oil prices, oil shock, U.S. economy

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Reader Comments (Page 1 of 1)

12-08-2008 @ 4:37PM

JCH said...

When Jimmy Carter named Paul Volcker to be the chairman of the Fed, Volcker purposefully started a process to cause a recession. It had little at all to do with oil.

12-08-2008 @ 4:46PM

Badabing said...

$1.75 a gallon- exactly where they should be.

12-08-2008 @ 7:19PM

JCH said...

Exactly where they should be for a severe recession. Great place to be. Marvelous.

Oil producers, even Canada and the United States, are going to respond with production cuts. The price is going to go up.