Oil At $25 A Barrel? Pump Gas $1.50? The Time Is Coming Soon

It’s nearly Memorial Day and time again to kick off the 2009 summer driving season. Each year just prior to the holiday weekend, the major talking point in the media is undoubtedly “What will the cost per gallon of gasoline be over the summer?”

This driving season, holiday travelers will have something to rejoice about; lower fuel prices. Average gas and diesel prices are significantly off of their all time highs reached last year on July 17th, 2008 at $4.114 and $4.845/gallon respectively. The fall in prices has been so pronounced in fact, that AAA has forecast that travel will be up 1.5% over the holiday weekend. A counterintuitive estimate, when one considers the US’s staggering 8.9% unemployment rate. With average prices today around $2.26 for gas and $2.28 for diesel, off roughly 50% from last year, what should the average consumer expect for the summer? The next several months? Or even… the next several years?

In an attempt to predict where fuel prices will be in the future, it would be wise to understand how we got to where we are today. The large run down in retail fuel prices, from all time highs in 2008, has been driven primarily by concerns that the global recession would be long and deep. Those same concerns have helped to increase the global strength of the US Dollar (the currency by which energy is primarily priced – bearish for oil) and spurred global crude oil demand concerns within the market. By mid July of 2008, Crude Oil traders the world over saw their fears of a long global recession begin to materialize. The dollar began to rally, and demand estimate after demand estimate indicated a dire future for oil was nearly unavoidable. As a result, crude began its decent from an all time high of $147.27 a barrel in July of 08′, to a five year low of $32 a barrel in February of 2009. As you can see from the chart below crude’s fall was highly correlated to the price of retail fuel; leading per gallon costs lower until around December of 2008.

Commodities News