At What Point Will Gas Prices Make You Walk?

Oil prices have taken a dive and the demand for gasoline in the U.S. is down, but in the long-term, it sounds like higher prices are here to stay. What's the tipping point where we'll see a significant change in consumer behavior? Host Liane Hansen talks with Phil Flynn, an energy analyst with PFGBEST about the economic impact of high gas prices.

LIANE HANSEN, host:

Phil Flynn is an energy analyst with PFG Best Futures in Chicago. He joins us from Oakwood Hills, Illinois to talk more about the economic impact of high gasoline prices. Welcome to the program.

Mr. PHIL FLYNN (Energy Analyst, PFG Best Futures): Hi, Liane, it's great to be here.

HANSEN: As we just heard, oil prices have taken a dive. The demand for gasoline in the U.S. is down. Will gasoline prices come down, too?

Mr. FLYNN: I think they are. I think our long national gasoline price spike nightmare has come to an end. And we saw significant change in the fundamentals in the outlook for the value of the dollar. So because of that, I think, you know, barring some disaster in the Middle East, we're going to see prices come down and maybe dramatically so.

HANSEN: How soon?

Mr. FLYNN: I think very shortly - even before Memorial Day.

HANSEN: But what about the long term? There's growing demand for gasoline in China and India, for example, so it seems like high prices may be here to stay.

Mr. FLYNN: Well, I think we're in a different era. There is no doubt about it. You know, the question is, are we in an era where every time we go to the gasoline station, you know, prices go up five cents a day like we've been going through, or are we going to see a little bit of a stabilization?

I think if you look at the situation with gasoline, this recent run-up wasn't all about supply and demand. It was really about the purchasing power of the dollar and the confidence in the U.S. economy. And when that confidence in the dollar and the U.S. economy was shaken, the value and purchasing power of the dollar became weakened. And that really drove up the cost.

Now if we get a little more confidence in the dollar and the U.S. economy, the dollar will become stronger and so despite the fact that, you know, we may be consuming more, we may actually be paying less.

HANSEN: Is there a tipping point though, a specific dollar amount where you'll see a significant change in consumer behavior?

Mr. FLYNN: You know, to be honest with you, Liane, we already have seen it.

HANSEN: Really?

Mr. FLYNN: You know, we've seen demand for gasoline fall five or six weeks in a row. We've seen it affect the economic data. The non-manufacturing number this week was very weak. The ADP employment was very weak. And despite the fact that we had a blockbuster jobs number, the job growth isn't what it would've been if we didn't see that uncertainty with higher gasoline prices.

HANSEN: Given that we have gone through and are still going through high prices for gas, could you imagine an effect on the economy such as people would begin to reconsider the size of the cars that they're buying?

Mr. FLYNN: Liane, that's happening already. What we are seeing from Ford, General Motors, all of the major car makers is a shift towards more fuel-efficient cars - in fact, probably one of the most significant shifts we've seen since the 1970s. So I think we're already changing our behavior when it comes to our gas-guzzling ways. And in a weird way that could be good for the economy because that's going to mean lower demand in the future.

I think if you look at the psychological impact of these rising gasoline prices over the last few months, it's come at a very critical time for the U.S. economy. I mean we're just trying to get up off the mat after the economic slowdown and this sharp spike in price really seemed to hurt. But I think people are starting to realize it's not just about supply and demand, it's not just about the Middle East, it's about economic policy.

And I think if the U.S. government gets their budget under control or gets a budget deal, I think if we can basically start talking about getting in line with interest rates, it could actually increase the value of the dollar and bring down the cost of gasoline and food for everybody.

HANSEN: Phil Flynn is an energy analyst with PFG Best Futures in Chicago. Thank you very much.

Mr. FLYNN: Thanks, Liane.

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