Tuesday, August 12, 2008

Forcasting Gas Prices

I seem to be a few days late with this forecast. Things are changing on the world stage. I estimated a little low for 2008 prices, and they continued going up for more than a month longer than usual. The price drops we have been experiencing for about the past three weeks is the one we usually got around Memorial Day in past years, and we might not have gotten it at all, were it not for China curtailing driving during the Olympics. More on that later.

Right now, here is "The Bottom Line," right up front.
My forecast for May 2009 gas prices is $5.83 per gallon.
Sounds high, but here is how I got there.

I have been doing these forecasts for about 6 years now (but only about three years in this blog), and have refined my formula each of the past three years. It has however, been getting harder to forecast lately because of China's (and India's) ever increasing role in consumption. This summer gas prices have dropped off in August, but that may be due to China curtailing driving to keep the air cleaner for the Olympics. This may not pan out in future years, and the price may remain high until late fall, or may not drop at all and simply rise again the following spring.

My current formula for
the next April/May price spike is as follows:
Take the predominant price of crude oil
in (late) July (and some early Aug)
that would be $120 a barrel (more on this later),
divide by 25 (giving $4.80) and
add $.65 to account for the taxes ($5.45)
and factor in about 7% for inflation.
The result is a forecast of $5.83 per gallon for gas.

As noted in the first linked article below, these forecasts are not accurate enough for buying and selling futures on the commodities markets. I find it more and more difficult to get this across to others, but speculation is at best a gamble, as many who speculated on August oil found out. The rapid drop in oil prices made it difficult for me to do this forecast, but there are some speculators out there who likely went bankrupt. This forecast, however, should be useful enough for writing a budget for next years transportation costs. As such I hope city, state and county budget planners will not ignore the rising cost of fuel as they have in the past.

Here are some past articles I have written
My original forecast in this blog and my reasons for doing these forecasts
Discussion of my technique for forecasting.
Early spring discussion of gas prices and my formula.
Discussion of (in)accuracy in my forecast.
Discussion of Ethanol's failure to pan out as a fuel.
Epidemic of imports from China.
Gas Price forecast for May 2008.
Forecast update to account for inflation.

I think this article could also be the rational for choosing a car that is stingy on gas for next year's driving season. I did, and am glad for it.

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