Market Overview

UPDATE: Will $5 Per Gallon Gas Sink the US Economy in 2012?

I recently discussed the prospect of $5 per gallon gasoline and any accompanying effects on the US economy in 2012. I previously wrote how "various news agencies are reporting that some analysts are saying that we could see $5 per gallon gasoline prices" this year.

Whereas GasBuddy analysts were expected to release their 2012 projection, CBS Chicago reported Friday that "[g]asoline prices could approach $5 a gallon by Memorial Day and stay [at] record levels for much of the summer, according to a forecast by GasBuddy.com." From the article: "Gas prices always spike in the summer, but the 2012 GasBuddy.com Price Outlook predicts this summer will break records."

Senior analyst Patrick DeHaan commented, "It looks like it might be the most painful year at the pump that we have ever seen." DeHaan commented that "there are several factors that will cause the increase" including an improving economy with increasing demand and issues with Iran. From the article: "As the United States imposes sanctions, the country [of Iran] responds with threats to close a key oil transit pathway: The Strait of Hormuz."

According to the text of GasBuddy's Annual Gasoline Price Outlook 2012, "GasBuddy accurately forecasted the US national average for last Memorial Day as early as January, 2011. GasBuddy also accurately forecasted Thanksgiving Day 2011 prices in August, 2011." While some analysts feared that gas prices would rise to $5 per gallon in 2012, GasBuddy's forecast appears to show that the median US average price of gas will go no higher than $4.20 this year. Even so, GasBuddy's 2012 Memorial Day forecast portends gas prices to be between $4.50 and $4.85 for San Francisco in comparison to $4.15-$4.50 for Detroit and $4.20-$4.55 for Columbus. On the "low" end, the forecast portends gas prices between $3.80 and $4.15 for Dallas and $3.90 to $4.25 for Indianapolis. According to GasBuddy.com, the current national average price for gasoline is $3.35 per gallon.

GasBuddy's forecast includes a quote from DeHaan: "While the 2012 outlook isn't what I'd call rosy, we can look to Europe at their $6-$9/gallon gasoline and be happy that we're still not paying as much as some countries." That being the case, such comparisons to Europe may be unfounded and/or inaccurate as many European cities have much more developed public transportation systems. For those living in the Midwestern US with long daily commute times courtesy of suburban sprawl (where it can take at least 15 to 20 minutes driving to get anywhere), better public transportation may be desirable and long overdue. Of course, as we are not seeing a loud public outcry for higher taxes and better public transportation systems, we must remember that the road goes both ways (no pun intended).

Further, DeHaan commented that the 2012 situation with Iran is "far worse" than 2011's Libya situation. DeHaan: "Consumers who think the Iran situation is over-hyped clearly don't understand the high stakes behind not only the Strait of Hormuz, but behind the Iran's[sic] feud with the West." DeHaan went so far as to say that "Motorists who drive a SUV [sic] may want to consider calling their banking institution and obtain a credit limit increase so they can afford this summer's fuel expenses."

Traders may want to take note of periods in 2012 that GasBuddy believes will see high gasoline volatility. The first period is from April 15 to May 31 owing to refinery maintenance issues and possible problems. The second period is from August 1 to September 15: "Hurricane season has brought significant harm to oil infrastructure in the last decade, and while hurricanes are not guaranteed to impact such facilities, such an event could interrupt notable infrastructure... The fear of a storm impacts oil prices." The third period is from October 15 to November 15 as the "[w]inter gasoline phase in will likely lead to some downward direction, but could also result in some volatility surrounding refinery maintenance. This time frame will likely see lower volatility in prices compared to the previous two timeframes listed."

While analysts may point to the Strait of Hormuz as a geographic linchpin for black gold, the Atlantic Wire reported Friday that the US Navy is using dolphins to maintain stability of the world's oil trade. The dolphins would be used to detect mines in the event that Iran attempted to close the Strait. Even further, the US has readied a contingency plan in the event of an Iranian military crisis. Reuters from Jan. 6, 2012: "Western powers this week readied a contingency plan to tap a record volume from emergency stockpiles to replace nearly all the Gulf oil that would be lost if Iran blocks the Strait of Hormuz."

As for a strike on Iran, the Wall Street Journal reported on Saturday that "US defense leaders are increasingly concerned that Israel is preparing to take military action against Iran... President Barack Obama, Defense Secretary Leon Panetta and other top officials have delivered a string of private messages to Israeli leaders warning about the dire consequences of a strike." In light of Iranian boats recently approaching US naval ships and the recent assassination of an Iranian nuclear scientist, one cannot help but fear that the situation with Iran is about to get white-hot. Per GasBuddy's forecast, Iran will continue "to be a major factor that could result in higher gasoline prices in 2012".

In terms of gas prices, while it may be too soon to write off a summer vacation or the 2012 holiday shopping season, GasBuddy's forecast is most likely foreboding to US consumers who are already stretched. If gas prices rise to the level of $5 per gallon this summer, I think at that point, we can forget about the 2012 holiday shopping season as US consumers would lose all that precious disposable income at the pump. (If Israel or the US decides to attack Iran with gas thereafter skyrocketing to $9-$10 per gallon, you may hear an economist like Nouriel Roubini this year say that at that point it's time to head for the hills.) And as higher gas prices translate into higher prices for everything else, pain at the pump may very well become a roadblock to economic recovery. It would appear that 2012 may be a wild ride for the oil trade. Thus, as the world economy runs on oil, you may want to fasten your seat belt.

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