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July 10th, 2008

Oil’s Getting Cheaper, So Why Isn’t Gas?

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As far as winning the war against high gas prices, it seems like Americans are doing almost all the right things. When the national average price of gasoline hit $4.108 this week, its highest mark ever, government data revealed drivers have cut back on their gasoline consumption to the lowest levels seen in five years. Refineries are producing less, stockpiles are growing, and there’s more than enough gas to last through the summer.

Back to basics: Ample supply, coupled with weak demand should begin to edge gas prices down. So why aren’t they?

There will always a lag in pricing to a certain degree. After a barrel of oil reached over $145 in June, prices have slowly declined, settling today at just over $137 a barrel. History reveals that prices will always rise faster than they will fall, and the raw cost of oil is only one component of the final price of a gallon of gas.

However, as demand for gasoline wanes, the demand for diesel fuel continues to grow. Diesel demand is up nearly 6% since 2007, and the national average price has risen 65%. Even our environmentally conscious ethanol fuel must be shipped out of the corn fields using diesel guzzling tractor trailers.

It’s going to take more than a 3.3% decline in US driving habits to carve a significant chunk out of gas prices. As large oil-consuming countries like China and India are reducing subsidies on gas, and their prices begin to rise, higher costs will deflate global demand, and prices should drop along with it.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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