Unpredictable Oil Prices: Bad for Business?

As we move toward the Memorial Day weekend, who knows exactly what a gallon of gasoline will cost? As I write this, oil prices--after rising steadily for the last several weeks--have started to slide, based on data suggesting the economic recovery may take longer than previously thought. June delivery oil was at $59.08 a barrel (after rising as high as $60.48).

A gallon that costs $2.31 today (a countrywide average) might have cost $2.05 last month. But buy a gallon regular of unleaded in Milwaukee this coming weekend and AAA predicts you're likely to pay an average of $2.48. That price is 38 cents higher than it was a month ago--but considerably less than the $3.96 Wisconsin consumers paid this time a year ago.

Pump price uncertainty confuses consumers, and it certainly affects their willingness to buy big cars. A Chrysler dealer (one who survived the cut) told me last week that, despite the economy, he's selling small SUVs but can't give the big ones away.

One of the reasons auto companies embraced President Obama's tough national tailpipe greenhouse gas standards for cars and trucks, announced today, is that it provides them some sense of predictability. They wanted a single national standard, and they got it. But oil prices are still a considerable wild card. The only way to guarantee stable oil prices is to set a price floor (at perhaps $3 or $3.50 a gallon) but that is unlikely to be palatable politically.

Ironically, oil and gas companies have been cutting production because prices are so much lower than they were a year ago. The paradox is that production cuts could spark a huge price spike, as McKinsey and Company warned last March. "While global energy demand growth will see a short-term lull in 2009, the potential looms for liquids demand growth to outpace supply creating a new spike in oil prices as soon as 2010 to 2013, depending on the depth of the economic downturn," McKinsey said.