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November 2010

Vol. 15, No. 45 Week of November 07, 2010

Not-so-happy holidays ahead at gas pump

Sandy Shore

Associated Press Business Writer

There’s one place holiday shoppers probably won’t find a bargain this year: At the gas pump.

There is plenty of oil and gasoline on hand, and pump prices usually fall this time of year. So what’s causing the run-up? Most analysts point to the Federal Reserve’s $600 billion economic stimulus effort.

The national average for a gallon of unleaded gasoline was $2.806 Nov. 4, according to AAA, Wright Express and Oil Price Information Service. That’s about 7 cents more than a month ago and 12 cents above a year ago. It will probably keep rising. Some analysts think the price could be a nickel to a dime more by Thanksgiving.

The strength of the dollar and the price of oil are closely linked. The dollar has been getting weaker against other currencies for weeks, ahead of the Fed decision and will probably fall further as more dollars pour into the economy.

Oil is priced in dollars and becomes cheaper for holders of foreign currency when the dollar falls. Europeans, for example, get more dollars for their euros and can buy more oil for fewer euros. Since oil is cheaper for them, they buy more, sending up the dollar price of oil.

Energy traders expect this to happen, so they buy oil when the dollar falls, boosting the effect.

Benchmark crude for December delivery rose $1.69 to $86.38 a barrel in Nov. 4 afternoon trading on the New York Mercantile Exchange.

When the dollar weakens, investors would rather hold hard assets like oil and other commodities because hard assets protect them against more weakening and inflation.

Higher prices projected

The likely outcome for consumers will be higher prices at the pump and for basics like food.

“Effectively, what the Fed did yesterday was impose a new tax on consumers,” Cameron Hanover analyst Peter Beutel said.

Oil prices hit a high for the year of $87.15 a barrel during intraday trading in early May, when gas pump prices were around $2.90 a gallon. They’re heading back there again.

For every penny the price at the pump increases, it costs consumers an additional $4 million, Beutel said. If the price rises a dime, it means consumers pay $40 million more each day that 10-cent hike is in place.

At the current national average of $2.80 per gallon, a typical motorist using about 50 gallons of fuel per month will spend about $140.

“Gasoline prices are almost probably, in my opinion, double what they ought to be,” said Beutel. “So the question is ... those people who have jobs, how much longer can they afford to pay ever-higher prices at the pump.”

Discretionary driving down

Higher gas prices already have prompted consumers to cut back on discretionary weekend driving, said John Gamel, director of economic analysis for MasterCard Advisors SpendingPulse.

It’s similar to the trend in 2008 when consumers started conserving on travel as gas prices first rose above $3.15 a gallon and then spiked over $4 a gallon.

Still, that doesn’t necessarily mean consumers will cut back in other areas. Holiday shoppers, unlike summer vacationers, have options like buying online, said Kamalesh Rao, director of economic research for MasterCard Advisors SpendingPulse. In many cases online prices are lower than in stores.

Typically, about 10 percent to 11 percent of all retail spending is spent on gas in the winter. That increases to a range of 15 percent to 16 percent during the summer when more Americans take driving vacations, Rao said.

In other Nymex trading in December contracts Nov. 4, heating oil added 4.40 cents at $2.3719 a gallon, gasoline gained 3.64 cents to $2.1744 a gallon and natural gas fell 5 cents to $3.786 per 1,000 cubic feet.

In London, Brent crude climbed $1.55 to $87.93 a barrel on the ICE Futures exchange.





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