Saturday, May 10, 2008

How expensive is gasoline going to get?

I have seen a couple of stories on this (this one is from Balloon Juice), probably from the same source, which essentially say this. Oil refineries have been shielding the gasoline buying public from the true cost of gas by the fact they have been hedging the price of oil for some time. I don’t really understand hedging. Here is the Wiki explanation:

In finance, a hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. Hedging is a strategy designed to minimize exposure to an unwanted business risk, while still allowing the business to profit from an investment activity. Typically, a hedger might invest in a security that he believes is under-priced relative to its "fair value" (for example a mortgage loan that he is then making), and combine this with a short sale of a related security or securities. Thus the hedger is indifferent to the movements of the market as a whole, and is interested only in the performance of the 'under-priced' security relative to the hedge.

So, it would appear that the refineries have been pumping out gasoline and other petroleum-based products that are more in line with oil at around $85 a barrel. It is now running around $125 a barrel. That’s getting very close to being underpriced by about 50%. When the hedging runs out and the “real” cost of gasoline (not counting the oil companies rather obscene profits, of course) shows up at the pump, how do you think most Americans are going to react, especially if they haven’t been given any warning that this is coming? Gas is currently about $3.75 a gallon locally. I don’t know what it is in the rest of the country. I believe that Washington state is one of the highest places in the country, due to the taxes involved. But if, in the space of about a month, gas were to jump from around $4 a gallon to $6, that’s going to cause some people to really start freaking out. And that assumes that the price of crude oil remains the same, which it won’t, of course. These stories I have seen have predictions that the price of gasoline at the pump might hit anywhere from $6 to $8 a gallon, and possibly even beyond.

If the price to fill up even a small car that gets good mileage starts hitting $60 or $70 each time up pull up to the pump, this country is going to really start feeling some fallout. I think we are already to that point. It hasn’t started really hurting yet. I am, in no way, marginalizing the impact on low and middle class families that rising fuel costs and food prices are having. There are many, many families that are already struggling. They are facing choices of how to pay for food and utility bills. This is a terrible thing for many people. I am talking more about the impact at a national level, however cold that might seen to the people already in trouble. I haven't even factored in the still very real possibility of an economic meltdown due to the sub-prime mortgage mess.

When 80% of the regular commerce which could be called “optional”, such as going out to the movies or sporting events, going out to dinner, buying new clothes, furniture and home appliances, the economic impact is going to be severe. People are just not going to be able to keep up with anything except the basic necessities, such as food, energy for getting to work and keeping the house warm in winter. And this assumes they still have jobs. Those jobs are going to dry up when there aren’t any customers left.

I am hoping I am wrong, but this could end up resembling the Great Depression or perhaps Italy after World War II. It won’t be pretty. And what really worries me is that there are lot of very angry, very wound up conservatives with guns who have been essentially told by the nutjobs on radio and television that they are absolutely right to be upset, it’s someone else’s fault they are in this predicament and they should go out and do something about it right now!

That possibility, however small, really has me concerned.

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