Financial analyst shares thoughts on gas prices

Financial analyst shares thoughts on gas prices

By JOHN BRANNON Messenger Staff Reporter In 2007, gasoline usage in the United States dropped 4 percent. The total demand worldwide is up only 3 percent. Yet the price of crude oil has almost doubled. You’ve seen the pump price escalate to a shocking $3.95 a gallon for gasoline and $4.50 a gallon for diesel fuel. “People are doing what people have always done when the price went up,” said Raymond J. Kelly of Flint, Mich. “Some people commute, some decide to vacation close to home, truckers try to get a full load instead of a half load. It all adds up.” Kelly is senior vice president of the Flint, Mich., branch of Raymond James & Associates, a nationwide financial advisory firm. He was branch manager 30 years. A 1963 graduate of Notre Dame University and a 1965 graduate of Oxford University at Oxford, England, he is also a veteran of the Vietnam War. “People start making a lot of little decisions, one by one, based on their own self-interests,” Kelly said. “All that stuff is reducing our usage. The economy’s still positive. Maybe we’re at the edge of a recession, but so far, every quarter we’ve had positive numbers. We’re still growing at some rate but using less gasoline to do it. “There has been a pick up of demand worldwide. But 3 percent doesn’t equate to pushing the price up the way it’s gone up.” What, then, is the rest of the story? Kelly thinks he knows. But he wants you to set aside the myths about China and India driving more and gobbling up all the gas. Crude oil, pumped from deep in the earth and refined as gasoline and diesel and such, has of late become the shooting star of the commodities market. Ponder this data: • A barrel of crude has a capacity of 42 gallons. As the market price of a barrel of crude rises, so do pump prices of gasoline and diesel. • In 2003, a barrel of crude oil traded at about $17 a barrel. • In June 2007, it traded at $68 a barrel. • Today it trades at $127.63 a barrel. “The price of oil is up about 85 percent,” Kelly said. “I think the biggest reason is speculation. There’s a lot more people — some of them just ordinary folks — in it because it’s easier to do it now — speculating on the price of oil and the price of food. There has been lots and lots of new money going into these markets.” When you speculate in a certain market, you are well, betting, the price will go up or the price will go down. If half the people who put in new money figure it will go up and the other half figure it will go down, “nothing would change.” “So there’s obviously been a surge on the idea that it’s going to go up,” he said. And here’s another reason, he added. “Since 2000, there has been a tripling in what is called the commercial trading of crude oil on the New York mercantile exchange, which is the main exchange. “Look at it this way: I’m an oil company, you’re a refinery. I sell to you through this contract. That’s tripled. The oil companies themselves are doing more of it, maybe to hedge themselves,” he said. “But the pure speculative trading, such as the neurosurgeon who calls his commodities broker and says, ‘Buy me four carloads of West Texas crude,’ that has gone up 1,000 percent in the last eight years. “The people who buy into this feel they’ve discovered the goose that laid the golden eggs. It’s the psychology of markets. But when it starts to go down and they find they can lose 30 percent, that’s a different story.” A factor that drives people to the ‘buy’ side is supply, as in the classroom term “supply and demand.” Kelly said several countries — Russia, Nigeria and Mexico, to name a few — that have been suppliers of oil have seen production drop the last two years. “Mexico is one of the more puzzling ones. It’s down 15 percent,” he said. “They are scratching their heads trying to figure out what the problem is. It may have to do with geology.” But the biggest thing on his mind, the biggest worry, he said, is the huge wave of new money put into speculation. “The stock market’s not going up much. Bonds aren’t paying much,” he said. “So it’s, ‘Let’s put some of our money into commodities.’ “Once it started in oil, it spread to other things, such as food. Well, food is more likely to trigger some fairly significant government reaction somewhere in the world. Food riots bring down governments. When the price of tacos in Mexico go up 75 percent, as they did last summer, it meant trouble for the government. “I think things will happen on food before they’ll happen on oil.” Does Kelly see this thing turning around? “I think we’ll see lower prices, barring a huge hurricane that really rips up the Gulf, and barring another 9-11 event,” he said. “I think we’ll get a break some time this summer, barring one of those really bad events. Maybe it’ll settle down to about $100 barrel, and that’s better than $130 barrel. The $100 barrel means a pump price of $3.10 to $3.20 a gallon for gas.” Published in The Messenger 6.6.08

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