When Will Gas Prices Finally Go Down?

  • Gas prices are at historic highs this June.
  • Summer driving season may take prices even higher, as seasonality often does through August.
  • History suggests the worst will be over after Labor Day.
When Will Gas Prices Finally Go Down? - When Will Gas Prices Finally Go Down?

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The pain at the pump continues, seemingly unabated. Gas prices recently reached the highest levels on record. The national average for regular gasoline hit $4.97 a gallon according to AAA. This is a sharp rise of 15% from just a month ago and over 60% higher than this time last year.

Diesel prices, which fuel the trucking industry, are now up even-more-an astounding 79% in the past 12 months. The cost to ship everyday items like food and clothes has soared dramatically. This is evident at the check-out counter. Target (NYSE:TGT) and Walmart (NYSE:WMT) both highlighted the big increase in shipping costs on their most recent earnings calls.

Pain at the pump translates to pain in the pocketbook as well.

Summer Swelter Should Increase Gas Prices

Seasonality should drive prices even higher in the short run, everything being equal. The U.S. Energy Information Administration (EIA) notes that gas prices tend to rise in late spring and peak by late summer as driving miles hit their peak.

Also, environmental regulations require more expensive summer gasoline blends during the summer months, though the EPA waived that this summer citing the price squeeze. Gas prices in August were roughly 10% higher than gas prices in January over the past two decades. It might be a tough few months before any relief is seen if seasonality holds true once again.

Darkest Before The Dawn

The price of oil is by far the biggest component of gas prices. It accounts for more than half of the overall price. Taxes, distribution and refining costs make up the balance.

Lately, headlines calling for $200 per barrel oil or even $300 abound. This would take gas prices into the stratosphere. A headline from the New York Times — “An Oracle of Oil Predicts $200-a-Barrel Crude” — is just one such example.

Now if you look closely at the article from the Times, you will see that it is actually from May 21, 2008. This was the last time oil prices were near the current levels. Not only did oil never reach $200 per barrel back then, it never got even got to $150. Oil prices peaked at $147.27 in July 2008 before dropping like a rock. The reason? Demand destruction and additional supply.

Higher oil prices inevitably lead to lower demand, or demand destruction. ConocoPhillips (NYSE:COP) CEO Ryan Lance recently talked about this very subject. Consequently, higher oil prices bring more supply to the market as OPEC opens the spigot a little wider. It also makes shale a much more viable oil-producing method despite its higher production costs. This one-two punch of lower demand and higher supply is the exact opposite of what drove oil prices to where they are now — higher demand and tighter supply.

Commodities generally and oil in particular tend to take part in this self-correcting mechanism. Wildly high oil prices never last for that long. Usually the fear mongering headlines of astronomical oil prices is a reliable sign the top may be near.

Mark Twain supposedly once said “History doesn’t repeat itself, but it does rhyme.” Unless something else major goes wrong, look for a similar scenario to unfold with oil and gas prices now as happened in 2008. The next few months may see even higher prices as the summer driving season kicks into high gear, but ultimately relief will come. Gas prices should start to fall in the fall. But until then it very well may be a long, hot summer at the gas pumps for consumers.

On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


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