3 Reasons Gasoline is Going to $5 a Gallon

One of the benefits of The Great Recession has been a respite from high gas prices.  Unfortunately, I think this break will be over very soon and that record high gasoline prices are just around the corner.

Back in July of 2008, the average price for a gallon of regular unleaded gasoline hit a record high of $4.12 per gallon.  Within six months, the bottom had fallen out of the economy and the average price of gasoline had dropped to $1.60 per gallon.

Gas PricesThanks to drastic coordinated measures by the world’s central banks and governments, a total economic collapse was avoided, an economic rebound started to take hold, and gasoline prices climbed back to the $2.60 range.

While avoiding a total “end of the world as we know it” scenario was certainly something that had to be done, the money printing measures may have set us up to face much higher gasoline prices in the near-term future.

Below are the three main reasons why I believe not only will we break the record high prices set back in July 2008, but we can expect to start paying $5 or more for gasoline.

Drastic Increase in the Money Supply

laffer-monetarybaseOne of the biggest concerns of the United States Federal Reserve throughout The Great Recession has been deflation, which is essentially falling prices of goods and services.

So, in order to help keep deflation at bay, the Federal Reserve drastically increased the amount of dollars available in the economy, which is easy to do considering we have a fiat currency system.  This means our paper money is essentially not pegged to anything in order to determine it’s true value, and can be printed, for lack of a better term, at will.

This certainly helps stave off deflation, but also sets us up for extreme inflation, which is nothing more than more dollars chasing the same amount of goods.

Since the price of oil is set in dollars, it would make sense that if the amount of dollars in circulation increases, the price of oil – or the required number of dollars to get the same amount of oil – would increase as well.

Because gasoline’s main “ingredient” is oil, if the price of oil shoots higher, the price of gasoline will shoot higher as well.

However, if the Federal Reserve is able to withdraw all of the extra money and stimulus it has pumped into the economy in a timely manner, this problem can averted.  However, the Federal Reserve has demonstrated that they tend to be well behind the curve, so I am not holding my breath that they will be proactive in keeping inflation at bay.

China’s Consumption and Growing Middle Class

Even throughout the economic crisis and worldwide recession, China’s oil consumption continued to increase month over month, and it is predicted that China’s oil imports will triple by 2030.  Between now and then, China’s oil demand is expected to grow by nearly 4% per year.

This growth will put tremendous pressure on the price of oil in the near-term.

Much of increase in China’s demand for oil is due to the rise of China’s middle class.  The more the middle class grows, the more disposable income there is to be spent throughout the Chinese economy.  Much of this money will be spent on the main symbol of the middle class – a car.

With China having the world’s largest population, even just a slight increase in the number of people considered “middle class” will lead to several million more cars on the road.  Since these cars will need gasoline, the demand for oil is going to skyrocket.

Economic Improvement

Based on a poll of economists, it is expected that the U.S. economy will grow at 2.7% in 2010.  While this certainly wouldn’t be classified as robust growth, it’s a drastic improvement over 2009, when the economy actually shrank.

If employment picks up – which is a distinct possibility – it will be the most definitive sign that the economic recovery is here to stay (at least until we get into an inflationary recession in 2011).  In turn, this will boost oil consumption by consumers and businesses alike, driving the price of both oil and gasoline much higher.

And, if there is a hint that the economic recovery will end up being more robust than currently predicted, a spike in the price of oil and gasoline will not be far behind.

$5 Gasoline

These three things add up to the very real possibility that we will be facing $5 gasoline in the very near future.  Obviously, things are still very volatile, so I could very well be wrong.

However – not to pat myself on the back – I’m feeling pretty good about this one.

What are your thoughts?  Is $5 gas right around the corner?  Leave your comments below!

Comments

  1. That’s getting expensive for gas, I found a cool way to save some money, check out my blog for more info: http://carinfo-juan.com/blog/

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  2. Aboslutely it’s going to go to $5 and beyond. The government wants to sell the crappy, ugly GM cars so they can get their money back in order to “buy” friends around the world. The only way GM will sell their POS is for gas to be sky high. So the government, Warmers, and Tree Huggers have a vested interest in gas prices rocketing up. GM should have been allowed to fail, they built crappy products for years and they are still churning out garbage.

  3. Thanks for the comments.

    SpitBaby – I’m not following your logic. GM is still mostly producing larger vehicles, so why would they want gas prices to increase? They’re working towards a smaller fleet, so in the future it won’t be as big of a problem for them.

    I do agree that for years the Big 3 ignored the possibility of higher gas prices, but lately the reliability of their vehicles has increased and put them on par with foreign cars.

  4. Dan Braasch says:

    I agree we will see $4 and above gas in the near future, and probably $5 in a year or two. I do have a 125cc scooter that I supplement my driving with, but living in Chicago, the weather limits my scooter riding to about 20% of my yearly miles. Not enough to make a large dent.

    My disgust is with ALL auto manufacturers. There is NO reason we cannot have more fuel efficient vehicles across the board, even using straight gasoline engines. I had a 1979 Dodge Onmi that got in the low 40′s on the highway, and mid-30′s around town. That wasn’t EPA ratings, that’s what I got driving it. The car wasn’t built well, but that’s another story.

    The point is, with today’s technology, we should be at least that good, if not better. Yes, I realize that emissions laws are stricter, but if we take today’s technology into account, that should be at the very least an even draw.

    Dan

  5. Europe has had gas at more than $5 for years. I think that we will be facing $5-7 gas in the near future. The main reason for that began in 1973, the first gas crisis. That was when we began to decrease in domestic production and became more dependent on foreign oil. That has not gone away. The Alaska pipeline helped, but we will not have enough fuel and prices will rise. Our dependence on lithium from foreign sources is putting us in the same position with electric vehicles. We need to be funding different sources of technology so we are not dependent on just one.

  6. Corinne Edwards says:

    There was an honest to goodness PYSCHIC on a money show on CNN last night.

    She said the same thing. Scary.

  7. Bruce, the reason Europe has had $5 gas for awhile is due to the way it’s taxed; my argument for $5 gas in the U.S. is because I think we’re about to enter a hyper-inflationary period.

    Corinne, why CNN would have a psychic on a money show is beyond me…

  8. The average price in the UK is now £5 a gallon – almost exactly $8 :(

  9. Steven Robello says:

    Brian, I believe you are spot-on with your analogy. I believe that OPEC and the controling faction had their hands around our throats and were “choking” us for all they could when prices achieved the $4.50/gallon range. When the economy tanked, they eased the chokehold a bit to give us a chance to get our breath back (nice of them, don’t you think).
    With the economy “projected’ to improve, gas prices are creeping up (it’s increased $ .14/gallon in the last 2 weeks here in Hawaii). OPEC will continue to choke us as long as it makes financial sense for them. The Big 3 is producing more fuel efficient vehicles, but as long as the market demands it, the gas guzzling trucks and SUV’s will continue to be a mainstay for them.
    I recall the days when only Ford and Chevy made trucks. Now it seems like all the manufacturers are making them.

  10. When your vehicles stop operating when they seize-up because
    of the coming 15% ethonal fuel, you will net need to by gasoline-
    we will end-up riding bicycles, which would be healthier. Perhaps
    the government could just mandate that – but then who would by that corn surplus then?

    WASHINGTON TIMES, APRIL 5, 2010:
    Stop ‘Big Corn’
    Ethanol subsidies drive up gas and food prices
    The Environmental Protection Agency wants to dump more corn into your fuel tank this summer, and it’s going to cost more than you think.

    The agency is expected to approve a request from 52 ethanol producers known collectively as “Growth Energy” to boost existing requirements that gasoline contain 10 percent ethanol to 15 percent. The change means billions more in government subsidies for companies in the business of growing corn and converting it into ethanol. For the rest of us, it means significantly higher gasoline and food prices.

    It’s time that this shameless corporate welfare gets plowed under.

    In 2007, members of Congress joined with the Bush administration in mandating by government fiat the annual sale of 36 billion gallons of ethanol by 2022. To meet the ambitious sales targets, the EPA has little choice but to approve the 15 percent ethanol fuel blend. Big Corn’s advocates claim that forcing Americans to use this renewable fuel would reduce dependency on Mideast oil and lead to cleaner air. It’s just as likely, however, that they want to get their hands on the $16 billion a year from the 45-cent-per-gallon “blender’s tax credit” – in addition to the various state and federal mandates giving us no choice but to pump their pricey product into our fuel tanks.

    The benefits are overstated. According to the EPA, reduction in foreign imports will result in $3.7 billion in “energy security benefits” at the expense of $18 billion in increased fuel costs by 2022. Environmental testing has proved inconclusive, as certain types of pollutants increase when ethanol content increases. It should be noted that the EPA’s track record on “environmental” gasoline additives includes Methyl Tertiary Butyl Ether (MTBE), a possible carcinogen whose once-mandated use has contaminated groundwater across the country.

    Ethanol’s environmental credentials are further weakened by its inefficiency as a fuel. Higher ethanol concentration will reduce the gas mileage of America’s cars across the board by 5.3 percent. In addition to the pain that adds at the pump, repair bills will mount when engines not designed to handle 15 percent ethanol run lean and suffer increased wear and misfires. Because vehicle warranties specifically exclude damage from the use of unapproved fuels, the additional price for this boondoggle will fall on drivers.

    The same problem hits gas stations where pumps and underground storage tanks are not certified for use with elevated ethanol levels. The cost of replacing perfectly good equipment will, once again, be passed on to the consumer.

    Even those who do not own automobiles will begin to feel the pinch as more and more farm land is shifted towards taking advantage of government-subsidized ethanol production instead of food. Groups as diverse as the Grocery Manufacturers Association, the National Chicken Council and the American Meat Institute realize that this policy is distorting the market for food prices.

    According to the University of Missouri’s Farm and Policy Research Institute, the ethanol tax credit increases corn prices by 18 cents a barrel, wheat by 15 cents and soybeans by 28 cents. That means higher prices for most food items at the grocery store and restaurants.

    There simply is no justification – environmental or otherwise – for this interventionist scheme. With the economy reeling, consumers can no longer afford to bankroll the politically connected agricultural lobby. The EPA should reject the 15 percent ethanol requirement and Congress should send Big Corn’s rent seekers elsewhere with the repeal of all ethanol subsidies.”

  11. Gasoline prices are going to make a new record. It will reach $5 per gallon by July 4th and go up to $5.70 by next Thanksgiven. Here is our reality.. Food prices as well as clothing is up also. China said, cotton was taking a 30% jump, this past November. But the USA does not need this, at a time when we are clawing our way out of a Recession.

  12. Wow, didn’t know ethanol was so dangerous? Especially since my own personal experience of mileage, cost, and good running equipment so good for past three years. Read up on the processing technology and engine technology appears to me, ethanol will become more popular. It’s a better fuel. First the simple molecule has excellent purity. No complex and varying hydrocarbons in the brew. Pollution and combustion chemistry greatly simplified. The fuel enables more advanced engines operating at higher efficiencies. Race engines produce more power with ethanol. Ethanol will make your engine behave or run smoother with more power. Ethanol makes gas into premium fuel. It boost octane and a natural for detergent action. Engine parts such as spark plugs and injectors stay clean. No need to remove carbon deposits in engines that burn ethanol blended fuel. Same with water contamination. Ethanol will just absorb water and allow your engine to burn as if it were fuel. This is critical during winter months. Remember the old days with carb freeze up or stalled motors that sucked in just a tiny amount of water? Ethanol in fuel supply eliminates that problem. Actually, our unleaded fuel nowadays needs ethanol to boost the low grade petrol to standard. Meaning ethanol is allowing low grade and cheaper petrol to burn as standard. While the base stock has slightly less btu’s it does save consumers money thanks to ethanol. Don’t spend your money on premium gasoline. Just mix in more ethanol as first it will save you money and secondly it is a better fuel than the expensive premium. Gas companies have learned to scare auto driving public with ethanol and drive them to very profitable premium fuels. They love to impugn ethanol as it a threat to their bottom line and control of fuel market. Read up on ethanol to separate fact from fiction. Like any new fuel a learning curve to best apply benefits.

  13. I’m reading all these theories as to why gasoline is going up. What I’m not reading is how the working class American will afford to buy it and still have money to live on. I’ve traveled literally all over the world and yes, gasoline is expensive but every family in those countries didn’t own autos. What they did have though was cheap public conveyances.
    I am convinced that Americans are getting more stupid with each generation.
    this is the statement of a 71 year old man. One who has been there ,done that!

  14. One of the counter forces is the drop in gasoline demand. Five dollar gasoline will also effectively end the economic recovery for many Americans. If we do see $5 gasoline the other possibilty is the conversion of vehicles to natural gas. With the huge over supply of natural gas, this is very feasible. Locally this has alraedy happened on a small scale.

    It wasn’t that long ago that Ford offered vehicles with the option.

  15. I dont think we will ever be told the truth. Lets use logic. Its being use at an alarming rate and I’m sure we will run low..walk when you can. keep your house cool in the winter and warmer in the summer..at least you’ll not be spending what others are. If we all did this around the world we could extend the suppy for a lot longer.

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