Thursday, October 27, 2005

It's 1986, all over again

Gas prices continue to decrease. I put $20 worth into my tank yesterday, and the price ($2.55/gal) was actually lower than I remember during the week before Labor Day ($2.56/gal).

Not surprising to me, at all. In fact, just a few weeks ago, when prices started to decline, I predicted to a co-worker that the price of gas would be below $2.50 by Christmas. I expected prices to correct naturally, as they always do, but I didn't think they'd go into free-fall. Now it's not unreasonable to expect gas to be below $2.00/gal by the end of the year.

Why? Because there's alot of speculative money in the price of oil. Over the past few years, oil has been seen as the stock market was perceived during in the 90's: A can't miss investment that would always increase in value. So people kept buying oil, and the price kept increasing and exceeding what would be reasonable given the demand. And because what goes up, must come down, now all those speculators are losing their shirts as high prices have finally crimped demand and they find themselves holding a big barrel of oil.

I saw this happen in 1986. Gas prices had skyrocketed in the early 80's and stubbornly remained over $1.00/gallon (ah, the good old days). Then suddenly, in the summer of 1986, the bottom fell out of the market. Gas prices that experts had predicted would never go below $1.00/gal ever again were now as low as $0.69/gal. And all the oil companies took a bath.

I think the same thing is happening now. The post-Katrina price shock has forced consumers into a conservation mode, and the demand has dropped accordingly. But because the price is still higher than what the market will bear, it will continue to drop. By this time next year, gas prices will be much more reasonable and in line with the realities of the market.

Which is bad news for the Democrats. High gas prices are one of their "winning issues", and it will likely not be an issue in the 2006 elections. Given that they don't have any issues other than the Republicans are Evil, it won't help that their predictions of doom and gloom have once again failed to come true.


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