Light sweet crude oil future dropped sharply in New York trade Thursday (June 19) following an announcement from China that it was going to hike fuel prices 16-18 per cent. This news is expected to slow demand in the nation that has been leading the way in oil use this year thanks to earthquake reconstruction and new development. Oil speculators expect the price increase to significantly soften demand.

Oil dropped $4.75 to close at $131.93 after trading up near $139 earlier in the day. It was not just the China news that led to the price drop. There was widespread speculation that agreements were developing between Iraq and several Western oil companies that would lead to strong boosts in the Middle Eastern nation’s oil output. Significant production increases are definitely going to have a positive impact on helping push hold back additional oil surges. Recent data has indicated demand has hit a plateau in most Western countries so the supply and demand equation is definitely swinging toward lower oil in the coming months.

Retail gas was not affected much by today’s oil events and price moves. The national retail average gas price fell just .2 cents to $4.073. Despite the modest move lower today, most analysts agree that with the current oil scenario and expected downward crude slide, lower retail gas should be a foregone conclusion. This would certainly be welcomed news by Americans who are exhausted and overwhelmed with gas and grocery prices.

As much of the Midwest is just starting to uncover the true nature of the damage caused by historic floods, some economists have called for $5 gas to come this summer based on ruined corn crops. Iowa and Illinois, two of the top corn producers in the US, have experienced over $1 billion in lost agricultural production, according to early estimates. Corn is used in ethanol production. Ethanol is required for gasoline production in the US. Similar to a drop in oil production, a drop in corn production can lead to higher gas prices if the corn crop is affected dramatically, as it has been. Much of the $5 speculation has been softened in the last few days thanks to other economic and oil factors. Milder, dryer weather in affected states has also lightened the mood a bit.

Americans seem convicted to take control of the gasoline situation themselves rather than allowing Mother Nature to take charge. New April gas consumption data shows that Americans drove and incredible 1.4 billion fewer highway miles in April 2008, compared to April 2007. Such a steep decline in individual gas consumption, combined with already lower business use of oil and gas, also bode well for gasoline prices.

Airlines have also cancelled many flights based on much lower demand for air transportation from businesses and consumers working to cut costs. Flights that are still running have been supplied many reduced price ticket buyers. Many airlines have been running specials and discounted ticket prices through the end of the year, even during busy holiday travel time periods.

The dollar has been stagnant and even slipped a bit against major currencies this week. After a late surge last week that put the dollar back at high points over the last several months, the momentum has been paused with some negative market data earlier in the week. The flat dollar likely contributed to retail gas prices not dropping more. Another upward dollar move could really strengthen a reduction in fuel prices in the next several weeks.

Market Recap

Stocks dropped sharply again Wednesday as the Dow closes in on a drop below 12,000. The Dow was down 131 points on the day. The NASDAQ and S&P were down 28 and 13 points. Financial sector concerns were the biggest down note on the day. FedEx offered a disappointing fourth quarter profit report. Stocks were strong Thursday as the Dow jumped 32 points. However, it was the tech-heavy NASDAQ that really impressed with a 32 point rise also. Arrests at Bear Stearns brought to the forefront some of the dishonest mortgage practices by sub-prime lenders. Oil dropped sharply to $131 per barrel.

Neil Kokemuller
Thursday, June 19, 2008
9:31 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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