And Gas Prices Roar Back

Includes: USO
by: Hale Stewart

By New Deal Democrat

One thing I hope I'm clear about when I discuss the oil choke collar is that I claim no special knowledge as to what will happen with energy prices in any kind of short-term time frame. My impression is that large speculators can and do push gas prices up and down over the short term, roughly between $3 and $4 a gallon, and constantly relieve the suckers of their betting money. Once you get past a few months, the economy reacts to the relatively high or low price by accelerating or decelerating.

In this way, the price of gas acts like a governor on the speed of the economy. I do believe that increased efficiency, alternate sources of energy, and new discoveries of petroleum will act over the longer term to lower prices. That may have already started this year, but we will see. In any event, after retreating just below $3.50 a gallon by the end of April, in just the last 20 days it has zoomed back up over 5% to about $3.70. Here's the relevant graph from Gasbuddy:

Following my back-of-the-envelope formula, take this increase, divide it by 10 (or 16 if you want to be conservative), and add 0.1%. Then you should be very close to the non-seasonally adjusted inflation rate for the month. This gives us a 0.5% or 0.6% increase in prices for May -- as of now. Since there is no significant seasonal adjustment this month, that will also be the adjusted inflation rate. This will also have a significant effect on real wages and sales.