For economic commentary and analysis, go to the Bonddad Blog
Gas prices typically rise in the summer. Traders call the summer the "summer driving season" because of the increased fuel demand that usually occurs. However, gas prices are already spiking, meaning this summer could be exceptionally painful.
From CBS MarketWatch:
Geoff Sundstrom, a spokesman for motorist group AAA, said that "the information contained in [Wednesday's] DOE report, when taken together -- strong demand for gasoline, reduced domestic output due to a spate of refinery problems and lower imports -- mean the nationwide average price of self-serve regular will probably hit $3 per gallon in the next few days."
"They could possibly set a new all-time record high price before the end of the month," he said. AAA's Daily Fuel Gauge report pegged the latest average price for regular gasoline at $2.977.
"What is most alarming about these price and supply developments are that they are occurring without a backdrop of natural or man-made disasters as happened in 2005 [Hurricane Katrina] and 2006 [Israel's Invasion of Lebanon]," Sundstrom said in an e-mailed statement.
"Because oil prices today are at least $10 less expensive per barrel than when gasoline prices previously exceeded $3 per gallon, almost all of the price pressure on gasoline can now be attributed to America's continuing -- and increasing -- inability to supply enough refined gasoline to the marketplace," he said.
Here's a chart from a recent Wall Street Journal article. Notice that while prices are typically spiked starting in the roughly mid-summer, prices are now spiking before the summer begins.
So, why is this happening" Gasoline stockpiles are decreasing at a fast pace. Here is a chart on the situation from the most recent This Week in Petroleum. Notice that stockpiles have now decreased for 12 straight weeks.
One of the central problems is refiners are having more technical problems than usual.
Oil refining's perception problem has taken a new, unflattering turn: Not only are there not enough U.S. refineries, they don't run right.
After several years of calls for more production capacity in one of the world's most technically sophisticated industries, attention has shifted to what appears to be an unusual number of breakdowns and extended downtime that has raised concerns about the adequacy of oil-product supplies.
Just about every day in recent weeks, a period when refineries ramp up production, unit malfunctions, fires and other mishaps have had oil traders and market watchers riveted. Oil futures and wholesale prices have staged breathtaking rallies that traders say are due to the prospect of lost supply and falling inventories.
So, what does this mean?
1.) Consumer spending may take a hit as gasoline prices increase. While the economy withstood higher gas prices last summer, the backdrop now is completely different. We've had four quarters of bad GDP and housing news. High gas prices might be the straw that breaks the camel's back. Consumer spending is the only thing holding the economy above recessionary levels right now.
2.) This will lead to further inflationary pressure. Remember the Fed as an inflation target of 1% - 2%. As gas prices increase, so does inflationary pressure. This will add to the Fed's dilemma of whether to raise rates to fight inflation or lower rates to stimulate the economy.