Sunday, October 26, 2014, 5:00PM: On June 5, there was a hike to $3.99 in Michigan. Today, you can find gas under $3. What a move! Looking ahead, the recent jump $3.19 coincided with another drop in wholesale prices, so there is a lot of room for prices to drop this week. I would be looking for gas below $2.90 soon.
Now, what explains this 25% drop in retail prices since June, and an even better record the past several years? I have a few theories: (1) In September, I wonder if some hedge funds got caught “leaning the wrong way”, betting on higher energy prices. When that did not materialize, they had to liquidate their bets, causing a sudden drop in prices. I have no evidence of this, other than I’ve seen this happen before, especially in stocks and other commodities. (2) There is significant evidence that the demand for oil and gas has been falling the past several years, while the supply has been rising, due in part to significant increases in US production. We have been driving less, buying fewer cars, and fuel efficiency has been improving. Consequently, we have been buying less gasoline (which is what the Democrats wanted), while supplies have been increasing (which is what the Republicans wanted). Hence, a bipartisan victory — lower prices. (3) Energy “investors” are looking at the Middle East differently than they did a decade ago. Then, with the war in Iraq, there was a “global tensions premium” built into energy prices. As our involvement in Iraq has wound down, the premium has slowly disappeared, and, in the case of the past few months, not so slowly. What is confounding about this theory is that we have new Middle Eastern tensions (a.k.a., ISIS). But, perhaps ISIS is not as big a deal as it appears, or perhaps the US really is heading towards energy independence as politicians have talked about since 9/11, and finally, in 2014, we are starting to reap the benefits.
In terms of the Gas Game, it is harder to predict price hikes when there are fewer hikes. But I’m not complaining!!!! — Ed A.