Oil futures spiked to another new record over $129 per barrel Tuesday (May 20) dragging retail gas prices along for the ride. Prices at the pump topped $3.80 per gallon, according to the Energy Information Administration. Forecasters that called for $4 per gallon prices this summer likely did not anticipate having their forecasts within site this soon, but supply concerns continue to shoot prices higher. OPEC has reiterated recently it does not have plans to drastically increase its supply of oil.

As gas prices have moved quickly toward the $4 per gallon mark, new calls are circulating for $5 gas at some point in the near future. As Goldman Sachs recently suggested oil of $150-200 within two years, it would make sense that $5 per gallon gas is possible as well. This is assuming there is no intervention or non-market factor that impacts the progress of prices. With reports continuing to suggest consumer prices are on the rise, and inflation concerns remain, anything other than improved supply and demand economics would not likely suffice.

Leading politicians, including presidential candidates, have tossed around the notion of a ‘gas-tax holiday’. This would be a short period of time during which federal gas taxes would be removed, essentially offering a governmental price intervention to help offset the rising costs of fuel. No strong indication has been given that the holiday will happen, as politicians have debated the pros and cons. The biggest beneficiaries of such an event would likely be those that travel long distances and with large vehicles that have big fuel tanks.

Today’s retail gas prices are 19 percent above the prices at this point last year. This demonstrates that along with supply impacts, consumer demand has also contributed to the ongoing rise and prices. From a psychological perspective, as gas prices rise and settle at a peak, consumers are ingrained with the mindset that a given price point is manageable. Following a dip, the return to that price point is usually met with less consumer resistance.

For instance, the first time gas cleared $3 per gallon a couple years ago, consumers were in uproar, car pools became more common, and public outcries were regular. Gas dipped back below $2 briefly during the early part of last year and the climb back over $3 was not quite as overwhelming.

Most economists do say that at some point consumers begin to say, “Enough is enough”. Although most experts say $140 oil is only days or weeks away, they also believe consumers will eventually make some lifestyle changes to deal with the incredible costs of fuel. A concerted effort on the part of a large constituency of consumers could create a massive impact on demand. This consumer empowerment might be necessary to put a stop to rising prices at some point. Gas is one of the least price sensitive consumer products for Americans because of reliance on the resource for transportation, heating, and other uses.

It is uncertain what will develop over the next several years with regard to fuel supply and oil and gas prices. There does not appear to be anything significant on the horizon to improve conditions. Improved economics in the US could help the dollar grow. Dollar strength would certainly help with oil and gas price control. Another uncertainty with energy resources are how quickly alternative fuel will be put into play. Growth in non-oil energy would have huge economic impact in the US and other foreign-oil based countries in the world.

Market Recap

Stocks were volatile in Monday’s trade but closed with a modest gain of 41 points for the Dow. Tuesday was very downbeat for the markets thanks largely to inflation concerns and another new record in oil prices. Oil spiked over $129 per barrel. Wholesale inflation actually slipped a little in April after a rise in March. Consumer spending seems to have been adversely impacted by prices, however. The Dow dropped 199 points to close at 12,828, dipping back below 13,000. The NASDAQ and S&P were down 23 and 13 points.

Neil Kokemuller
Tuesday, May 20, 2008
11:08 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

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