Stormy Gas Prices Ahead

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Gas prices have been coming down through the start of the summer season; however, the recovery in crude oil prices is expected to offset the seasonal easing.

Goldman Sachs Research analysts expect the base case for retail gas prices to average $3.40 per gallon in October this year. Still, the record high forecast for storms and hurricanes – expected around August to October – may cause wholesale and retail gas prices to spike, which may impact the upcoming US presidential election.

Goldman Sachs Research's base case is that US retail gasoline prices average $3.50/gallon in the second half of this year

GS WTI Crude, US retail gasoline and NYH RBOB (wholesale) gasoline price forecasts (USD/gal)

Source: EIA, CME, Goldman Sachs Global Investment Research

Gas prices tend to have an outsized effect on American consumers' perception of the economy likely because of how frequently consumers buy gas or see the large price signs at gas stations. Any large swing of gas prices could sway consumer sentiment and add fuel to the political contest.

Impact of storms on gas prices

The National Oceanic and Atmospheric Administration (NOAA) predicts about two to four times more major hurricanes than normal for the Atlantic hurricane season in its May outlook. This could have the potential to cause significant disruptions to the Gulf Coast refineries, which are responsible for about half of the country’s refining capacity. 

Any large disruptions could leave 10% of the peak disrupted capacity offline for a more extended period of time. Goldman Sachs Research analysts noted gas prices are usually known to be most volatile given that the US is a net importer, and resupply is much further away.

Wholesale gas refining margins have the potential to spike around extreme weather events by $5 per barrel or more depending on the exact path of the hurricanes. In addition, there can be significant negative impacts on gas demand from the poor weather and flooding.

The good news is the price impact tends to dissipate relatively quickly as refining capacity returns relatively rapidly. Our analysts expect US retail gasoline prices in October could rise to nearly $4 per gallon if the hurricane season is extreme or drop to $3.20 per gallon if crude oil prices are flat and disruptions are avoided.

The psychological effect of gas prices on inflation

There is a phenomenon on the perception of US gas prices when the prices hit $3.50 per gallon – it corresponds with the emotionally salient $50 to fill up a tank and coincides with the inflection point of when the media ramps up coverage on gas price inflation.

According to a recent study by former White House Council of Economic Advisers economist, Ryan Cummings and his team, when prices hits $3.50 per gallon, every 50 cent rise per gallon in gas prices results in a 7 percentage point increase in TV mentions. Surprisingly, this threshold has not risen with inflation over time.

In fact, Cummings and his team found that over the past 20 years, the threshold at which the media increases their gas price coverage has decreased substantially in real terms. For instance, just a decade ago, coverage would ramp up when the real gas price was at $4.75 per gallon; today, $3.50 per gallon triggers the media attention. Interestingly, cable news is four times more likely to drive the coverage than network news.

Goldman Sachs Research noted that Americans appear to be judging the state of the economy and government economic policy more harshly than usual and that voters still see inflation as the most important economic issue for the elections.

It’ll be interesting to see how gas prices would impact consumers’ perception of the economy and their overall confidence.

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