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Tracking a gaseous cloud


What's that smell?


I met with some old college buddies over the weekend to celebrate birthdays and an anniversary. One of the first conversations we had was how one spent over $60 to fill up their SUV. Each of our friends have families and were relating how schlepping them around to their various activities was creating a fairly large hole in their pocket these days.

A TV guest yesterday on a financial news station stated every $10 increase in the price of a barrel of oil subtracts 1% from GDP. After listening to what our friends were cutting out of their budgets to compensate for the higher gasoline prices, I have little problem believing this figure. Higher gasoline prices not only reduce the amount of cash we have to spend on goods, they simultaneously make those goods more expensive. Put one more hack mark in favor of Todd's theory of stagflation.

While there is little question we are in an economic recovery, we do have to worry about the effect of higher gasoline prices on that recovery. In addition, gasoline prices have become part of the presidential campaign landscape. Given both matters directly affect the market, I thought I'd take a moment and throw up a few charts on the price of gasoline and oil.

Here's the price of gas over the last decade or so. I started the chart in the presidential election year of 1992. This is not an indexed chart - prices are listed in pennies and the price of gasoline just happened to be near 100 pennies in 1992.

While the ugliness on the right side of the above chart probably draws your eye, I want you to notice something else that might be a little hard to see: In every case, gasoline prices decline into both presidential and mid-term elections.

Here's a chart of oil prices during the same time frame:

If you look closely at the oil chart, you'll see a different schedule of intra-year highs and lows. To save some squinting at both charts, I've compiled a table. You can see that in most years, the price of gasoline peaks in May or earlier.

I've highlighted the presidential election years in the table because you should note the price of gasoline in those years peaked earlier than the price of oil. Does this indicate we should see gasoline prices decline into the presidential election even if we don't see oil prices decline? History shows that would be a good bet, insofar as history can be our guide to future price actions of these commodities.

I did one more chart because I was curious as to the relationship between the price of oil and the price of gasoline. I wondered how much room gasoline refiners have to decrease prices into the election despite higher oil prices. The chart below is a simple ratio between the price of gasoline and the price of a barrel of oil.

You can see this ratio is bumping along at the bottom edge of its recent historical range, right about where it was in the 2000 election year. Gasoline prices peaked that year in September.

I'm not certain we can draw any firm conclusions from these data given these tumultuous times. There are some generalities that may help illuminate this particular drain on the economy. Since 1992:

1. Gasoline prices almost always peak in the first half of the year.
2. Gasoline prices always peak before an election in a presidential election year.
3. Gasoline prices can decline even if the value of a barrel of oil does not.

My guess is there is little chance gasoline prices continue to rise at the rate we have seen over the last month or so. I also believe it is more likely than not gasoline prices will decline into November to levels below today's prices. When and from what level that decline happens is something of an open question. Historically speaking, we should be close to seeing some relief.

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