We Want to Pump You Up!

We all like paying less at the pump, but this blessing may also carry a curse. Higher oil prices, when you take the “speculators” out of the mix (they got killed, by the way), mean high demand. And high demand results from higher activity – businesses sending fully-loaded trucks to retail stores, ships hauling cargo, business travel rising to manage expanding opportunities, leisure travel lifting holidays and vacations, people driving to restaurants and shopping malls, and state and the federal governments’ generating tax revenues to support infrastructure growth and repair as well as general government activities. When all this activity slows, (particularly on the drastic global scale that it has now) the demand for oil declines… and consequently so does the price.

In short, the prices of gasoline and diesel fuel are actually economic indicators of both consumer and business confidence. Most pundits see the obvious negative repercussions in seeking oil in difficult environments (oil sands, underwater drilling, Arctic drilling, etc.) where the cost per barrel of this “hard-to-extract” fuel is well above the $50/barrel we are seeing in the market today. They also have observed the disincentive, absent additional governmental subsidies, to commit funding to expensive research towards developing “alternative energy” resources, even though everyone knows that lower oil prices will sustain only in this sunken economy. We can only hope that part of President-elect Obama’s “New Deal” will still be directed towards the development of alternative fuels despite the current “bargain” in oil. When times are better, the dwindling supply coupled with the increased demand from countries like India and China, will inevitably drive the price of petroleum-based products, as well as natural gas, right back up into the stratosphere.

What’s most interesting about the sudden rapid rise and then fall in prices at the pump points to the overwhelming role of psychology in economic reality. The buying frenzy that caused speculators to bid the price of homes and stock prices to unprecedented heights also drove the price of oil sky high. The current panic has had the complete opposite effect, driving home, stock, and oil prices south for the approaching economic winter.

When people feel good about this economy, when consumer confidence allows folks to open up their pocket books because they believe the world is on the right track and resume the “active” lives they once experienced, you’ll know that the “spring thaw” is beginning. One way you’ll be able to tell if the economy is recovering is by watching the price of gasoline and diesel fuel at the pump – a consistent and steady rise in the cost of petroleum products is an index of better things to come. Never thought you’d actually want to see gasoline prices go up, did you?

I’m Peter Dekom, and sometimes what seems good might not actually be so good.