It's easy to get caught up in the day-to-day gyrations of the market, especially with the more pronounced volatility we have seen in crude lately. I doubt I need to remind everyone that we finished the year with spot WTI prices at a little over $90 per barrel and, as of the time of this writing, it has dropped to $86 a barrel.
Panning out the zoom on our lens, gasoline and crude prices are up 11% and 18%, respectively, compared to 2007 levels. Interestingly, foreign exchange rates (after posting steady growth over the last two years) are sitting exactly where they were in 2007. At present, the typical inverse relationship between crude prices and the US dollar is not holding to form. Spot oil prices are 5% below their YTD average, even while the US dollar has softened versus the Euro. A shift by traders to more emphasis on fundamentals and macroeconomic data would be the most obvious explanation for the recent correlation breakdown.
A key issue to watch over coming months is the average national pump price. Gasoline prices are approaching levels not seen since 2008. During the summer of 2008, the national average peaked at $4.11 per gallon of regular unleaded gas.
There is a real threshold that causes consumers to modify their driving patterns (i.e. a shrinking discretionary budget giving way to a reduction in miles driven) that could stall the current economic recovery underway.
Assuming that the average amount of annual discretionary spent per US household is approximately $1,000, then a $0.75 per gallon increase in gas prices would absorb practically all the discretionary budget for a two-car family. Using average 2010 gasoline prices as the base, this would imply that US drivers will see their discretionary budgets evaporate once gasoline prices top $3.50 per gallon.
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