Tuesday, May 12, 2009

Gas prices creeping up again

It's a little early to start being concerned about gas prices as they are still solidly in the $2.30-$2.40 range across much of NYS. However, it's important to note that in my opinion two of biggest factors that drove oil prices from $80 per barrel to $145 per barrel were traders chasing a momentum play and weakness in the US dollar.

Oil prices crossed $60 yesterday, its highest level since November. The US dollar is starting to show cracks and given our budget deficits and pending financial obligations like Social Security and Medicare, those cracks could grow. Also, a number of momentum traders have suddenly turned bullish on the idea of oil again. This sets up for another potential run in oil prices. I'm not a believer that oil can run too far in an extremely weak economic environment, but as we saw last year, reality and perception can separate for extended periods of time.

Also, while you will hear pundits talk about $3 gas or $3.50 gas as if it's not a big issue, remember that last year when gas was $4/gallon the national unemployment rate was 5.9%. We're almost 50% higher than that now and $3-$3.50 gas will in fact be a significant drag on the economy if it comes to fruition.


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