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What's Next for the Price of Gas

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Every day we see it in the headlines. Four dollar a gallon gas has just hit this city or that one. Concerns over whether this will lead to a consumer crunch are widespread.

Retail Analyst, Brian Sozzi at Wall Street Strategies, recently analyzed the impact of the gasoline prices on discretionary spending.

Sozzi says that right now the consumer has yet to change their spending habits due to rising gas price. But there is an important target price he's looking at that could change that trend.

"I think we are at a tipping point for the consumer, they have been able to absorb the increase because their financial standing is different than the last spike in 2008. If we get another leg up in prices, say $4.00 plus in every state, consumers will be trading down," Sozzi says.

One place where the impact of higher gas prices is likely to be felt early: convenience stores attached to gas stations. The increase in the wholesale price of gasoline has outpaced retail price increases and it is eroding retailer margins. For consumer buying power, a 10 gallon fill-up costs $7 more than it did in January and that $7 will cover most of the items those convenience stores try to sell inside the store.

The National Association of Convenience Stores, which represents stores responsible for about three-quarters of all the gasoline sold in the United States, says that 7 dollars means a lot to these small businesses.

"Retailers are getting pummeled on low or negative margins. Customer counts are down as well. It doesn't hurt as much at the pump where retailers may be breaking even, but its inside the store. People are buying fewer in-store items because they have less money to spend—or they feel they have spent enough at store and go elsewhere for their food. Unfortunately for retailers this is 2008 all over again."

"The only thing that saved them that year was the drop to $1.61 per gallon by December. I don't think anyone expects that and I know no one wants the economic meltdown to reoccur," a spokesman for the association told me.

One of the CEOs I speak with regularly told me he thinks the price of oil is being driven by the lack of clarity when it comes to the Congressional battle over the deficit.

"The fight in Washington is driving people into commodities over currency. When it comes to the United States fiscal house it may not be the ugliest home in the neighborhood but it is pretty ugly," he said.

With all of these comments swirling around I decided to get the perspective of Fadel Gheit, Senior Energy Analyst at Oppenheimer and Company.

LL: Gold is soaring S&P just downgraded the U.S. credit rating. How much are the ills of the US driving oil prices?

FG: Increased concern over potential supply disruption in the Middle East still has tremendous impact on the price of oil. We still have a lot of speculation in the market. Bets on the economy, bets on the currency, bets on inflation, bets on interest rates.

All these bets drive people into commodities and currencies. Usually lower interest rates depress the dollar and push oil prices up. Its the hedge against the dollar because lower interest rates give financial players cheap money to buy future contracts. The impact of the turmoil in the Middle East is its influence over how low the price of oil can be sustained.

The reason behind this is all these governments are trying to throw money at their people to keep peace at home. Be it Saudi Arabia, Kuwait, or Dubai, all these countries are obviously dictatorships.

They are very unpopular and they need to give their people more money to keep them quiet. Although OPEC can be profitable at prices below 30 dollars, they need more than 70 dollars a barrel to have enough revenue to buy peace at home.

The other thing, I was having lunch with the CEO of Suncor and I asked him specifically what kind of oil price do you need for new investment in oil sand projects and he told me between $70 and $75. I asked him what would technology do in the future to the price of oil and he said it would lower the price . So we have have established the low end of the oil price which is $70. Now most onshore US oil plays, not conventional oil plays are profitable at $60 a barrel. So basically I don't see $30 oil or $40 oil in the future but we could have it. We had it back in 2008 but it was not sustainable. I also do not see $150 oil. We saw that in

2008 but that too was not sustainable. I think oil prices will probably be in a range of 80 and 120 dollars for the foreseeable future.

LL: Some people I'm talking to are tying the price of oil to the budget battle we are seeing in Washington because of the policy uncertainty. How much influence could that have on the price of oil?

FG: People right now are worried more about the Middle East. But having said that Washington could have a tremendous impact on the price of oil if they have an energy policy. For example if they came out and said by 2016, we'll have every bus running on natural gas, that is a million barrels we don't have to buy from OPEC.

Having a national energy policy would go a long way. Unfortunately, this has been going on for 40 years and nothing has happened or will happen. It is a taboo no one really wants to tackle. But having said that, the U.S. is down but not out. We are important to the Global economy.

People can talk about China as much as they want but they still depend on exports.

LL: What price are we looking at when it comes to demand destruction?

FG: The driving patterns of Americans will change. If people have jobs to drive to they obviously will have to drive. But in California, they have 12 percent unemployment and if you think they are driving around looking for a job they are not. They are sitting at home watching television.

There is an adverse correlation between gasoline prices at the pump and demand growth. Believe it or not, our consumption has been declining for three years. It is slightly above 2009 which was the bottom. No one expects gasoline demand to increase in this country and it will continue to deteriorate because of renewable energy, hybrids and the overall energy efficiency of cars. There is no question gasoline demand will get weaker, the question is by how much.

A slowing economy will exacerbate this.

LL: Is there a gasoline price you are looking at that will be a key indicator for you when it comes to demand destruction?

FG: We have been talking about 4 dollar gas for a while but what I have found out is people get used to certain things. You complain at the beginning, oh my god prices are a x but you pay. For example, you would complain movie tickets are 10 dollars, but now they are at 15 dollars. We have a psychological barrier of what we are willing to pay and all of a sudden people get used to the prices and pay.

I would be disgruntled at buying a 15 dollar movie ticket but if I wanted to see that movie I would pay that price. I have been taking the train into work for 20 years. When I first started taking it, the price was 80 dollars, and now its 350 dollars! I can complain as much as I want, but what am I going to do? Walk home? Of course not.

The fact of the matter is, you are not going to picket prices at the pump. Ten years ago it was taboo to talk about three dollar gasoline, and now we are talking about four and five dollar gas. I don't expect it but we are already seeing parts of California with 4.70 and 4.80 a gallon. The prices are ridiculous. If we have 120 dollar oil we will see four dollar gas nationally. It is not out of the question. If gasoline prices continue to rise discretionary driving will go away first.

LL: In DC Fadel, there are reports gasoline is already at $5.00 a gallon.

FG: Good! They are the ones who created this.

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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."