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Rising Gas Prices Due to Weak Dollar

Audio

Aired 8/5/09

San Diego gas prices have inched up more than 10 cents in the past week, but some experts are baffled as to why. We're joined on Morning Edition by Phil Flynn Senior Market Analyst at PFG Best Research in Chicago, and a Fox Business News contributor.

Dwane Brown: San Diego gas prices have inched more than 10 cents in the last week. But some experts are baffled as to why. We are joined on Morning Edition by Phil Flynn, Senior Market Analyst at PFG Best Research in Chicago. He's also a Fox Business News contributor. Well, AAA, Phil says, there is no specific reason for the recent increase across California: what do you think is behind the high prices?

Phil Flynn: I think it's a little bit about the economic optimism that's been creeping back in the market and probably more than anything, the weak dollar. You know, one of the constants we've seen over the last few years when oil prices have gone up, is a weak dollar. In fact, if you looked at the value of the dollar in the global marketplace and overlay it with a chart of oil, they always seem to go in different directions. If the dollar is weak oil goes up and vice versa. Just recently, over the last few weeks, the dollar had hit an all-time low against the Euro currency. As concerns about record budget deficits and trade deficits pressure the market. And also, fears that if the economy does recover, it's going to come along with some inflation. I think that right now we're pricing in those realities in the price of gasoline.

Alan Ray: Three major refineries: Chevron, Arco and Valero all have cut supply. But demand is going down too, how does that square with rising prices?

Flynn: Part of the thing, when they cut down the refineries, it does raise the price. But they've cut, refinery runs, because nobody is buying the product. When demand goes down, prices should go down and think that if we were in Europe we would think they are going down. You know, remember that we're not trading oil and gasoline in a domestic marketplace. This is a global market, whether we like it or not, the policies we make and the money that we spend and the value of the dollar has its direct impact on what we pay for a gallon of gasoline.

Brown: Well, oil exports increased last month the highest level in Iraq since the U.S.-led invasion back in 2003, how do you think this will affect the world supply?

Flynn: I think over the long run, Iraq is going to be a major player in the world oil stage. Not today, not tomorrow, but ten years down the road they are going to rival Saudi Arabia as one of the players in the oil world. With the right kind of investment in the right kind of technology, the sky is the limit for Iraqi oil production. So, I think that's a positive in the world stage. I think in the short run, some of their increases in supplies are being offset by really record compliance by the OPEC cartel, which has done very, very well at holding back supplies. Now we are seeing signs they are starting to cheat just a little bit, but overall, OPEC compliance has been incredible and it has been one of the major factors in prices going up.

Ray: How might the volatility in the price of oil affect the U.S. economy and economic recovery?

Flynn: I think we're at a danger point now, to be honest with you, I don't think that oil prices and gasoline prices can continue to rise at the rate they have for the last two weeks and not have some ramifications. So, I think, we're hopefully getting to the top right now. It's always a double-edged sword, usually oil prices are going up when economic activity is good and we're using a lot of oil, and that's a good thing. But at the same time, if oil prices go up too fast and that same economic activity that we're rallying on can be squashed. This week, of course, we got very excited about the global industrial production numbers and manufacturing numbers, which seem to suggest that those sectors were bottoming out around the globe. But, that bottoming out may not continue if raw material prices continue to go through the roof. It's going to be a very delicate balance as we go forward.

Brown: Last question. Do you think the gas prices are going go above $3 a gallon here?

Flynn: I don't think so. You know, I'm hopeful we're very close to the high for the year. Obviously if the dollar continues to get whacked all bets are off, or something happens in Iran or the Middle Eastern politics, that could be it. But, I feel pretty confident we're close to a top, we shouldn't see prices go up too much further.

Brown: Thanks, Phil.

Flynn: Thanks, guys.

Brown: Phil Flynn, Senior Market Analyst at PFG Best Research in Chicago, also a Fox Business News contributor.

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