April 17, 2014

Gas Prices Decline as US Dollar Appreciates

While the recent ascent in the price for a barrel of oil would suggest higher gas prices for American consumers, the ascent of oil in recent months has not correlated to an ascent in gas prices. Typically, a $10 rise in the price of oil results with a 24 cent increase in the price for each gallon of gas, as discussed in the past here. This formula is generally accurate as exemplified in the link above in which the average price of gas was correctly calculated two weeks in advance, but the recent appreciation of the US Dollar is testing this formula.

The price of oil has gradually risen from $76 in late September to its current value of about $95, while the average price for a gallon of gas has simultaneously declined from $3.66 per gallon to $3.29 per gallon, according to the US Energy Administration. This nearly $20 rise in the price of oil has not resulted with a corresponding rise for the average price for a gallon of gas, which should have been about 48 cents to about $4.14 per gallon. Thus, the rise in oil suggests a 48 cent rise in the average price for a gallon of gas, yet the average price for a gallon of gas has actually declined 37 cents. As a result, the typically accurate formula for calculating fluctuations in gas prices based on fluctuations in oil prices is not applicable at this time, but which unforeseen variable accounts for this discrepancy?

The recent bounce in the value of the US Dollar (USD) has more than offset this rising cost of oil, thereby creating lower gas prices amid a rise in oil prices. In fact, during the exact same time period of late September to the present, the value of the US Dollar Index, which collectively measures the value of the USD against six other major currencies, hit its lowest point at the end of April in nearly three years, as this past article mentioned, which was about 73 (the higher the USD index, the higher the value of the USD). The USD index “churned” until late September, when a new uptrend for the USD began and broke out above 75. The current value of the USD index is at 80, which exemplifies the gradual rise in the value of the USD against other major currencies since late September, as the chart below shows. Unsurprisingly, the rise in the value of the USD correlates to the decline in gas prices; despite the simultaneous rise in the price of oil.

Notice the lows hit in late April, the churning until late September, and then the start of a new uptrend for the US Dollar.

More specifically, what has caused the new uptrend in the USD? A majority of this rise is due to the fiscal concerns ongoing in Europe. Interestingly, as the debt ceiling issues depreciated the value of the USD last summer, fiscal concerns are now depreciating the Euro. In other words, fiscal domestic problems depreciated the USD this past summer and resulted with a rise in the Euro, yet similar and perhaps even worse debt concerns are now haunting the Euro and has resulted with investors perceiving greater risk in the Euro. As a result, investors are now turning to other risk-aversion currencies, such as the Australian Dollar (AUD), as well as, ironically, the US Dollar. In fact, during late September each Euro was worth about $1.36, but only a few months later each Euro is now only worth about $1.30. Clearly, the recent appreciation of the USD is not only helping Americans who travel oversees, but also the prices of goods that impact our daily lives, such as gas prices.

Additionally, many long-term currency strategists expect the Euro to continue to decline against the USD until March and potentially descend below 1.25. However, a long-term calculation is difficult to recommend at this time, but ceteris paribus, the upcoming new Euro treaty that is due in March may likely continue to cause negative speculation and more risk-aversion away from the Euro, which would increase the value of other major risk-aversion currencies. As mentioned, the AUD and the USD are especially benefiting from the aversion away from the Euro. Traditionally, the Swiss Franc (CHF) has been known as the ultimate risk-aversion currency, but the fiscal problems for the Euro also has a negative impact for the nearby Swiss, as can be seen with the sharp rise of the USD against the CHF since September.

Overall, we can expect a gradual appreciation for the USD in coming months, ceteris paribus, which ought to reduce the average price for a gallon of gas below $3 and perhaps as low as $2.75 in late January, especially in geographic areas where gas is generally cheaper, such as southern states.

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