Flat, Fuel Cost. What Is Wrong With That?

Fairly steady crude oil prices and little change in supply and demand caused the gas price and diesel fuel cost to flatten last week.

Nationally, the average price for a gallon of regular unleaded gasoline was $2.04, down half a cent from last week. Diesel fuel was up one cent to $2.268.

“We still expect to see gradual increases in retail gas prices due largely to the supply and demand fundamentals that always contribute to an upward trend for fuel prices at this time of year,” Gregg Laskoski, a spokesman for AAA Auto Club South. “A surge in consumer demand, which is likely as Memorial Day weekend approaches, could push prices higher.” That will be determined if people have jobs and money to take them anywhere.

Diesel fuel volume at national truck stops have dropped by a national average of nearly 20 percent. Those bullish on oil point to the inevitability of “peak oil,” arguing that the time will come when we hit the peak of global oil production. From that point on, we’ll be able to pump less fuel and less oil out of the ground. In economic terms, we’ll face decreasing fuel supply.

Meanwhile, bulls argue that fuel demand will increase greatly, as China and other emerging markets fuel their economic growth with oil. On average, each person in the U.S. consumes about 25 barrels of oil a year; each person in China consumes just more than two. That’s a lot of possible future fuel demand.

And all of us amateur economists know what happens when you restrict fuel supply while simultaneously increasing fuel demand: prices rise. Um, weren’t these the same arguments made when oil was at $147 a barrel? Yup. At that price, all these favorable supply and demand assumptions were baked in, and then some. The subsequent fuel price fall highlights that we’ll only make great returns if we buy at low prices.

In other words, looking at fuel price movements by themselves just isn’t that helpful. We need to estimate oil’s intrinsic value. How do we do that? Great question? Stay tune for another issue when we will look further into fuel cost and fuel management.

Sokolis a outsourced fuel management & fuel consulting company, likes to keep clients and potenial clients up to speed in the fuel market. www.sokolisgroup.com