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High gas prices likely to be very temporary

Gas prices have risen quickly in the past month, but reductions in consumer spending and the payroll tax cut are helping to offset the costs.

Jeremy Hobson: Oil prices fell again today down to about $108 a barrel in New York trading. Prices have been spiking recently in part because of concerns about tensions with Iran. And gas prices -- which typically follow oil prices up -- have done just that. The nationwide average is now $3.71 a gallon -- that's up 30 cents from a month ago.

And that's where we'll start now with Juli Niemann, analyst with Smith, Moore and Company. She joins us live from St. Louis every Tuesday. Good morning Juli.

Juli Niemann: Good morning, Jeremy.

Hobson: So how much of this oil price rise is based on a rise in demand as the economy gets better, and how much of it is just speculation -- traders placing bets to make money?

Niemann: Well recently, coming up from the fall, we saw oil and gas prices rising somewhat due to economic recovery. But this latest wave is really true to market manipulation. 2008 we saw a huge rise in oil and gas, even as the economy was plunging -- that was speculation. Plunges in September and December of last year were due to speculators cashing out. So the decline in pricing that we're looking at right now is basically due to supply and demand, huge run-ups due to speculation.

Hobson: OK, now there are some people who watch these huge run-ups -- and we're still quite high -- and say this could pose a problem for the economic recovery. Do you think that's true?

Niemann: Well it could, but we're reducing consumer spending a bit, but not like it did in 2008. We're more dependent upon unemployment rates, and that's stabilizing. The payroll tax is putting enough money in the pockets to really offset it, so right now it's only going to cut back on Starbucks purchases. And no one's really freaking out and buying a $40,000 Chevy Volt yet.

Hobson: But $5 a gallon -- which is what we're approaching here in Los Angeles; I know some places are more like $3.70 -- but here in L.A. it's quite a bit more expensive. It does make you wonder about the future of the economy when you see prices like that at the pump.

Niemann: The good news is this isn't going to last, simply because we're entering the shoulder season -- that's between winter and summer: heating oil demand really drops, summer driving hasn't picked. There's just very limited demand here. So the spikes that we're seeing right now are likely to be very temporary. In fact, by the end of the spring, by June, I think we're going to see a big drop in the price of gasoline.

Hobson: Juli Niemann, analyst with Smith, Moore and Company. Thanks as always.

Niemann: You bet.

About the author

Juli Niemann is executive vice-president for research and portfolio management with Smith, Moore and Company.

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