Tuesday, May 27, 2008

Demand Down, Gas Prices Still Rising

The U.S. Transportation Department released statistics showing American drivers cut back their mileage in March. CNN reported:

Americans drove an estimated 4.3 percent less -- that's 11 billion fewer miles, the DOT's Federal Highway Administration said Monday, calling it "the sharpest yearly drop for any month in FHWA history." Records have been kept since 1942. According to AAA, for the first time since 2002, Americans said they were planning to drive less over the Memorial Day weekend than they did the year before.

According to AAA, the national average price for a gallon of regular gas rose to a record $3.936. That compares with an average price per gallon of $3.23 last Memorial Day. The Energy Information Administration says gas consumption for the first three months of 2008 is estimated to be down about 0.6 percent from the same time period in 2007.

What happened between March and Memorial Day? Surely big oil and OPEC are monitoring the data. How did they react? They celebrated record profitability. Middle East sovereign wealth funds kept raking in the billions, searching for ways to spend "your gas money."

What happened the last few months to drive oil prices skyward, especially if U.S. drivers parked their vehicles more frequently? The saber rattling against Iran grew in supply. The Jerusalem Post and Haaretz offered more inflammatory rhetoric from both sides. The JP even has a special section titled the "Iranian Threat."

So don't let President Bush's exhortations of free market solutions, supply and demand fool you. Producers are making hay while the sun shines. Consumers with no ability to pay could be the encroaching shadow. We've already seen it in health care with over 47 million uninsured, housing with rising foreclosures from the credit crisis, and retirement with fixed income seniors taking it on the chin over rising food and energy prices. It looks like the auto and mobility could be next.

In January 2007, I paid $1.769 a gallon for gas. While gas consumption in America went down 0.6%, the price roughly doubled in first quarter 2008. That it keeps rising, as driving demand falls, indicates something else is happening. A 120% increase in 15 months time? It's time to toss some tea in the harbor.