Thursday, April 28, 2011

Coming Summer 2012: $6 Gas

A dollar plumbing three-year lows is hitting Americans squarely in the gas tank, and one economist thinks it could drive prices as high as $6 a gallon or more by summertime under the right conditions.

With the greenback coming under increased pressure from Federal Reserve policies and investor appetite for more risk, there seems little direction but up for commodity prices, in particular energy and metals.

Weakness in the US currency feeds upward pressure on commodities, which are priced in dollars and thus come at a discount on the foreign markets.

One result has been a surge higher in gasoline prices to nearly $4 a gallon before the summer driving season even starts, a trend that economists say will be aggravated as demand increases and the summer storm season threatens to disrupt oil supplies.

"All we have to have is a couple badly placed hurricanes which could constrain some of the refinery output capacity in some key locations," says Richard Hastings, strategist at Global Hunter Securities in Charlotte, N.C. "If you get weakness in the dollar concurrent with the strong driving season concurrent with the impact of one or two hurricanes in the wrong place, prices could go up in a quasi-exponential manner."

Using a model that combines "subtle rates of change" with movements in the dollar index and commodity prices, Hastings figures the low dollar is responsible for about one-third, or $1.31, of the total gas-at-the-pump cost. Regular unleaded Wednesday was $3.84 a gallon nationwide, according to AAA...

Hastings projects the dollar index to test 72 at some point—another 3 percent drop—while Peter Cardillo, chief economist at Avalon Partners in New York, sees the dollar dropping to the 73.50 level.

"The global economy is quite strong, and the weak dollar is basically fueling even higher energy prices. That's not transitory," Cardillo says. "Gas prices in the Northeast are over $4 a gallon. How could anyone say that's not a burden?"

$6 Gas? Could Happen if Dollar Keeps Getting Weaker
Jeff Cox
Wednesday, 20 Apr 2011

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