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Gasoline At $3 A Gallon Could Kill Consumers

Thursday, 28 May 2009 | 12:40 PM ET

Prices at the gas pump have risen right along with the mercury — up about 19 percent this month, according to auto club AAA — and that's not good news for consumers.

Although most analysts expect we will not return to last summer's record-setting high levels, it seems gas prices will climb higher before they pull back. Crude oil is hitting six-month highs and much of the summer driving season still lies ahead.

But it may not take a return to last summer's $5 a gallon gas prices to destroy consumer demand, according to Global Hunter Securities Consumer Strategist Richard Hastings.

"It is possible $2.75 today is the $4 of last year," Hastings says.

  • Gas Prices Up or Down This Summer?

His analysis, which retraced consumer spending back to levels seen during June 2005, has determined that retail gas prices cannot exceed $1.94 without impairing consumer spending to some degree because consumers have less access to credit and are, therefore, more sensitive to inflationary pressures.

Fortunately, most analysts are calling for average gasoline prices to be below the $3 a gallon mark. According to Bankrate.com, U.S. gasoline prices are now hovering just above $2.25 a gallon, and the Energy Information Administration estimates that the nationwide price of gasoline will average a $2.23 a gallonthrough the end of September.

This prediction also is influenced by the expectation that as gas prices creep higher, consumers will drive less, and that change in behavior will occur at lower price points than it did last summer due to the recession.

As for Hastings, he expects the U.S. economy is in an "extremely lengthy bottoming process," and recovery will not follow any the classical patterns we are accustomed to seeing. Again, this assumption is partly due to the large amounts of debt consumers are struggling to pay down.

Even the recent strength in some of the economic reports, such as the much-talked about surge in consumer confidence, is not necessarily a sign of a return to quick boom times, he says. Instead, he chalks the move upward to the "unsustainable, numerically unsupportable" low levels in these gauges.

Hastings jokingly called those who subscribe to the idea that there are "green shoots" of recovery popping up in the economy "the vegetarians."

"They are really not thinking clearly, and they need to get their protein," he says. (If you're tired of "green shoots" too, suggest your own name.)

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