Explaining Southern California's economy

Gas prices: It's about the efficiency, people!

Mercer 20784

Corey Bridwell/KPCC

Gas prices at a Chevron station in Pasadena, CA.

As the price of oil pushes higher and gas prices ascend nationwide to levels we're already seeing in California, there's been unleashed a fury of discussion about "Why, oh why?" this is happening. Speculation on oil futures has been blamed (Hedge funds!), as has the threat of an Israeli strike on Iran's nuclear sites or a temporary shutdown of the Strait of Hormuz by Iran itself.

Neither makes much sense to me, although there may be elements of the true story in each. Speculators can drive prices up just to bet on them falling, so you have to factor in a certain amount of volatility there. As for Iran's naval capabilities...well, the Strait could be closed for maybe a few days, possibly even a week. But it wouldn't take long for the U.S. Navy to sink pretty much everything Iran has that floats.

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High California gas prices are actually a good thing

Mercer 20784

Corey Bridwell/KPCC

Gas prices at a Chevron station in Pasadena, CA.

Time to panic about rising gas prices in the Golden State? Most definitely, if you accept the L.A. Times' analysis:

The [gas] price surge has been particularly steep in California, in part because of maintenance at some refineries that make the state's cleaner-burning gasoline. Statewide, average pump prices for regular gasoline crossed the $4 mark over the weekend and reached an average of $4.031 a gallon Monday, up 5% in just the last week and nearly 9% higher than a month ago.

The price of oil is also moving up, due largely to two factors: worries about unrest in the Middle East over Iran's nuclear program; and commodities speculation. That second one is significant. Hedge funds could be playing the price run-up two ways, by betting on higher prices in the future, or by "shorting" the market and wagering that the price will come down.

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Visual Aid: Are falling gas prices telling us bad things about the economy?

I'm all about gas prices today, having already posted on the topic here and here. The price of gas is falling nationally, but there are some unusual things about how that's happening. I got the above chart from GasBuddy.com — it shows gas-price fluctutations over the past six years. There are two big spikes: in the summer of 2008, when the price got above $4 per gallon; and...the past spring, when the price climbed over $3.87 per gallon. One big difference between then and now: in 2011, we have 9.1 national unemployment. In 2008, in was under 6 percent. 

I've highlighted a stable period between the peaks. I think you have to factor in unrest in the Middle East when you look at the price increase in late 2010 and much of 2011. But what we're seeing now is the price of gas responding to a national economic forecast that expects sluggish growth and continued high unemployment.

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