Sunday, October 12, 2008

How to Determine Gas Prices in a Year

I don't want to mislead with my title. I don't own a crystal ball and can't predict exactly what fuel will cost at certain times. However, we have all been studying fuel prices rather closely the last few years and have begun to be able to see linkage between certain events and gas prices.

For example, as prices hit an all time high and hovering around $4.00 a gallon in the early part of the summer, House Republicans declared they were have a "staycation" like many other Americans and taking care of business by focusing on energy. The theme of the ad hoc Congress was "drill here, drill now" and the public and media took notice of the action. So did the oil speculators who lowered the price of oil per barrel, which showed up in our gas prices.
Another example was Senator John McCain declaring that he was changing his historic position of being opposed to domestic drilling and stating that everything should be brought to the table for consideration (biodesel, coal, etc.), including exploiting oil in the United States. He placed particular emphasis on the latter because of how that view stood in contrast to the Democrats position of avoiding all domestic drilling. The results was the further lowering of gas prices.

So, oil futures are based on projected consumption (demand) and projected supplies. The lack of oil in this country is not based on scarcity (which is created by nature), but because of shortages (which is based on government policies). With that, the single biggest factor about future supplies and prices of oil is the government. Oil speculators are convinced that the Democrats are hostile to domestic production (just look at their voting record and stated postions) and that the Republicans seem to take the pursuit seriously. With that, here is a quick breakdown of the future of prices:
  • If the Democrats win both the Congress and the White House, expect gas prices to grow exponentially. I project them to more than double the current $3.00 a gallon level by the elections of 2010. That $6.00 a gallon rate could be rather conservative.

  • If the Republicans win both the Congress and the White House, expect a rather significant drop in gas prices as long as the Legislative Branch makes domestic drilling a top priority. If they do that, you could see prices back around $2.00 or even less within two years.
  • If you have divided government where different parties dominate the Legislative and Executive branches, you will likely see prices remain about the same with a continued upward trend.

Don't be fooled by arguments that passing legislation that encourages domestic drilling won't immediately lower prices. We know that serious discussion alone can achieve that. If Americans are concerned about lowering gas prices, they should be very deliberate about the way they vote.

A few weeks ago gas prices began to rise at a rapid rate. This was about the time the media began to declare that it was unlikely McCain would win. It is largely based on futures.

So what about the recent drop in gas prices? Everyone is thrilled with them going below $3.00 a gallon in many parts of the country. Why this is happening is the "bad news" to this otherwise exciting news. The current financial crisis is now having a direct impact on gas prices. Oil futures project that we are going to have people driving less, companies transporting fewer goods less often, and factories demanding less energy because of projected manufacturing declines. The good news of lower fuel costs is actually an omen of bigger economic problems.

Watch the headlines and observe gas prices. You will see the link. Think carefully how you vote, because it could profoundly impact your financial future.

Kevin Price articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media.

Kevin Price is Host of the
Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at HoustonBusinessShow.com. Visit the archive of past shows here.

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