- The Washington Times - Friday, May 15, 2009


Exiting the week, the stock market has rebounded sharply since its March lows but has given back roughly 5 percent over the last few trading days. Some of that pullback may be due to a healthy pause and profit taking given the strong rise in the market, up as high as 37 percent only a few short days ago.

On the other hand, some of the market’s retrenchment could also be attributed to renewed concerns about the consumer. Earlier in the week, new data showed retail sales were weaker than expected for April.

This has reignited concerns over the consumer, the lifeblood of the domestic economy. In addition to rising unemployment levels and credit cards mentioned in recent columns, there is a new issue to add to my list of concerns about the consumer - rising gas prices.

In the last 11 weeks, average retail gasoline prices have climbed 19 percent, from a low of $1.86 per gallon in late February to $2.22 per gallon as of May 11, the Energy Information Administration reported. Data from other sources, such as auto club AAA, Wright Express and Oil Price Information Service, state that retail gas prices rose to $2.27 per gallon earlier this week. The Energy Information Administration projects average retail gasoline prices will peak near $2.30 per gallon, or a 24 percent increase from recent February lows.

The rationale behind that forecast reflects the recent rise in oil prices, one of the largest influences on gasoline prices. The increase in oil price is tempered by a net decline in global oil consumption due to the current global economic climate and the normal seasonal increase in gas prices reflecting the summer driving season. As background, in 2007 the price of crude oil averaged $68 per barrel and represented roughly 58 percent of the national average retail price of regular grade gasoline. By comparison, oil prices have risen to $58 per barrel this week compared with $38 to $39 in February.

Over the last several years the average increase in retail gasoline prices, from a low in February to the peak price during the summer driving season, was 47 percent. The lowest percentage increase in those periods was 36 percent and occurred during the February 2006 to August 2006 time frame when retail gasoline prices rose from $2.20 per gallon to $3.

Applying the low and average percentage increase over the last few years to recent low gasoline prices yields a potential retail gasoline price range of $2.53 to $2.73. What is likely to help restrain these gasoline prices is that the amount of crude in storage has kept prices in check. Despite a drop of 4.7 million barrels last week, crude in U.S. storage houses is the most since 1990.

To be fair, that range as well as the forecast offered by the Energy Information Administration are well below the $3.81 that retail gasoline prices averaged last year. However, the real issue is what a further upward move in retail gasoline price increases from current levels could do to an already fragile consumer. This is where the backdrop of current unemployment levels, already pressured disposable income and recent weakness in retail sales come into the picture.

Admittedly this is a negative view, but at the same time there is a concern to be had should the global economy rebound and strengthen faster than expected. This could result in an upward movement in oil prices should expectations swing to one of economic expansion from contraction. A potential risk in my view should such a scenario emerge, is that gas prices will continue to rise further than expected and potentially snuff out any looming rebound in consumer spending, thereby stagnating any consumer-led recovery. This would further hamper consumer spending on large ticket and other discretionary items.

People will still have to buy toothpaste as well as other toiletries, cleaning products and the like, which bodes well for companies like Kimberly-Clark, Colgate-Palmolive, Procter & Gamble, and Church & Dwight among others. Other potential beneficiaries, should that scenario play out, would be those who benefit from consumers trading down and could include McDonalds, Target, Wal-Mart, Costco and a handful of other companies.

• Chris Versace is the director of research of Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at [email protected] times.com. At the time of publication, Mr. Versace had no positions in companies mentioned, however, positions can change from time to time.

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