One of the benefits of The Great Recession has been a respite from high gas prices.Â 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.Â Within six months, the bottom had fallen out of the economy and the average price of gasoline had dropped to $1.60 per gallon.
Thanks 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
One 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.Â 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.Â 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.Â 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.Â The more the middle class grows, the more disposable income there is to be spent throughout the Chinese economy.Â 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.Â Since these cars will need gasoline, the demand for oil is going to skyrocket.
Based on a poll of economists, it is expected that the U.S. economy will grow at 2.7% in 2010.Â 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).Â 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.
These three things add up to the very real possibility that we will be facing $5 gasoline in the very near future.Â 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?Â Is $5 gas right around the corner?Â Leave your comments below!