Lowell's

We Were Wrong

Six months ago, the Lowell's Corporate Office of Fearless Predictions forecast that "Gasoline will be well above $3 a gallon by June, if not sooner."  As part of the prediction, we also said oil prices would reach $80 a barrel.

Well, we were wrong.

As of this writing, most stations in Lexington have gasoline at $2.65, and oil has been around $71 a barrel.

At the time of our forecast, gas was about $1.49 a gallon, and oil stood at $39 a barrel.  We predicted that a number of forces (weaker dollar, production cutbacks, greater demand, and speculation) would come together to drive oil prices upward.  We were generally right about the forces driving prices up, but we were wrong about their strength and timing.

In particular, it appears that the economic rebound and infrastructure build-out we foresaw to drive greater demand really didn't kick in as soon or as strongly as we expected.  We're slowly starting to see some signs of the rebound, but it didn't happen when we said it would.

We still expect $3-a-gallon gas by the end of the summer, and wouldn't be surprised to see $3.50 to $4 a gallon by the end of 2009.

That's what we see in our crystal ball.  What do you think?  Where will gas and oil prices go from here?

Why gas prices will go back up

From the Lowell's Corporate Office of Fearless Predictions:

Gasoline will be well above $3 a gallon by June, if not sooner.

The recent and dramatic decline in gas and oil prices has been great news for our wallets and our troubled economy, and the extra cash has provided some much needed relief from the barrage of recent bad news.  Oil is trading under $39 a barrel as I write this (It had topped $140 a barrel this summer).

But it won't last. 

How can I so sure?  I think part of the answer lies in how oil prices collapsed.  So we'll start there.

The Collapse

Three events converged -- and then fed one another -- to drive oil and gasoline to multi-year lows.  

Supply / Demand.  First, the economic slowdown combined with gas pump sticker shock to cause people to really pull back from using as much oil -- fewer and shorter trips.  Meanwhile, petro-regimes were ramping up production, greedily grabbing for historically high petroleum prices.  More oil + Less consumption = Lower prices.

Stronger Dollar.  This summer, really low interest rates had made the dollar incredibly weak in the world market.  Essentially, each dollar bought less of everything from other countries (including oil).  As the US slowdown began to hit other countries in early autumn, and their banks lowered interest rates too, the dollar was suddenly much stronger.  As a result, each dollar now bought much more oil.

Financial Meltdown.  Finally, much of the run-up in oil prices was driven by speculators in oil-based securities in the financial markets.  The speculators drank their own outrageous Kool-Aid as firms like Goldman Sachs predicted $250-a-barrel oil by the end of the year.  As so many financial firms imploded (think Bear Stearns, Lehman Brothers, Washington Mutual, Merrill Lynch, etc.), they unloaded their more-profitable oil holdings in a panic to generate additional cash. 

Any one of these trends would have driven down prices somewhat, but combined, they caused prices to fall to almost one-fourth of their summer highs.

The Coming Spike

There are signs that a couple of these trends are reversing, and that there will be a near-term spike in the price of oil.

Weaker Dollar.  The recent moves by the Federal Reserve to take their funds rate to 0% have not been followed by similar moves by bankers in Europe and Asia.  This has served to significantly weaken the dollar in the global markets.  Each dollar will buy less oil and gas.

Less Oil.  OPEC members, watching their rivers of cash dwindle, have recently indicated that they will curtail production in order to restore higher prices.

Greater Demand.  At the same time, the US and other countries are stoking the economic engines with incredible amounts of 'rocket fuel': The government's huge economic stimulus packages and dramatic financial moves -- from 0% interest rates to "infrastructure" projects to direct cash injections into failing firms -- will (eventually) ignite, and will help the economy rebound, probably very aggressively.  As the economy takes off, much more oil will be needed to move products and rebuild infrastructure.

Speculation.  I would expect some moderation in the financial speculation -- many speculators just aren't around anymore -- so I'd be surprised if the prices reach the levels of this past summer.  There's also the Kool-Aid factor: Merrill-Lynch recently speculated that oil prices would drop all the way to $25 a barrel.  They'll likely be as outrageously wrong as Goldman's $250 prediction...

I'd look for these counter-trends to get traction in early January, and for the economic rebound to begin gaining steam in the April - May timeframe.  By June, these counter-trends will work together to drive oil and gas prices up again.  Netting it all out: I would expect gas prices over $3 per gallon and oil prices over $80 per barrel.

But that's just my crystal ball...  What do you think?  Where will prices be in 6 months?

[where: 111 Mechanic St, Lexington, KY 40507]

How do you shop for gas?

I remember the oil crisis from the 1970's when I was growing up.  A habit I picked up from my parents during the crisis was to keep a mental catalog of which gas stations had the best pricing.  I tend to notice the day-to-day changes as I drive around town.

There's a BP and a Speedway which I pass on my way to and from work each day.  As gas prices dropped from $4 to near $1.50 per gallon over the past few months, the two stations moved prices down in tandem -- the BP's pricing was within 2 cents of Speedway's, usually higher. 

A few weeks ago, the BP started pricing 15 to 20 cents higher, and they have remained about 6 to 10 cents higher since. 

As I watched these fluctuations, I wondered how people shopped for gas, and if BP might be taking advantage of a particular customer behavior...  Do they take advantage of people who shop at BP no matter what?

So we'd like to know: How do you shop for gasoline?  Here are a few of the ways in which people might shop for gas.  Let us know if any of these match how you look for gas, or if you use a different strategy:

• Lowest Price: Shop for the lowest price, even if you need to drive a little further.
• Certain Brand: Try to go to the same brand, regardless of location (Shell, BP, Speedway, Sam's, etc.)
• Neighborhood: Look for a station that's close to home (or work)

Has your shopping for gas changed at all since the prices have come down, or do you still go to the same places?

I look forward to seeing your comments.

[where: 900 Winchester Rd, Lexington, KY 40507]