Economic Problems – Less Pain at the Pump, More Pain for you Everywhere Else

The price of oil fell sharply today, thanks to the collapse of investment house Lehman Brothers, and the growing concern that the United States is only in the beginning stages of a prolonged economic downturn.

After falling to as low as $94.13 per barrel, the price of oil closed the trading day at $95.71, which was down $5.47 from Friday’s close.  Today’s closing price represents oil’s lowest price since back in February, and means the value of oil has fallen nearly 35% since hitting a record high of over $147 back in mid-July.

Despite today’s drop in the price of oil, gasoline prices continued to rise across the country thanks to damage caused by Hurricane Ike.  While refinery capacity is slowly coming back up, at the height of the shut downs and evacuations, nearly 25% of the United States’ fuel refinery capacity was out of commission, causing gas prices to climb significantly higher for the first time in over two months.

WHAT DOES ALL OF THIS MEAN FOR YOU?

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Oil and Gas Prices Being Manipulated Before Presidential Election?

Over the last two months, the price of oil has declined nearly 28%, falling from a record high of $147.22 to Friday’s closing price of $106.23.  Likewise, the price of gasoline has declined more than 11%, falling from a record high of $4.12 to today’s average price of $3.65.

These price declines have come as a relief for many Americans, as they have helped ease the pain at the pump and pushed down inflation in general.

However, as welcome as these price declines have been, some drivers believe they’re coming about due to reasons beyond supply and demand or economic weakness.

According to a recent poll on Daily Fuel Economy Tip, nearly half of us feel that the prices of oil and gasoline are being manipulated leading up to the November Presidental election.

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People Somewhat Optimistic About The Possibility of $100 Oil

The last time the price of crude oil closed below $100 a barrel was back on March 3, 2008. As of this past Friday – four months since the final sub-$100 close – the price of crude oil closed at a record high of $145.29 per barrel.

Increasing global demand and stagnating (at best) supplies coupled with a weak dollar have been the major contributing factors to oil’s astronomical climb over the last several years. And to make matters worse, in both the short term and long term, it doesn’t appear as if things will get significantly better for either supply and demand or the dollar. This has led many prognosticators to warn the biggest price shocks may be yet to come.

Despite all of the gloom and doom regarding oil and gasoline prices, there are still plenty of people out there who believe oil prices will soon pop and within the next 12 months, we will see prices drop back to the $60 to $80 range.

So, to get a gauge of where Daily Fuel Economy Tip readers fall in this spectrum, I recently had a poll up on the site which very simply asked: “Do you believe oil will ever drop below $100 per barrel again?” Here’s how responses came back:

  • 41% believe oil will fall below $100 again
  • 59% believe oil will never fall below $100 again

While these numbers are clearly in favor of those who believe sub-$100 oil is a thing of the past, I found it kind of staggering that over 40% of respondents think $100 oil will have at least one last hurrah.

(Full disclosure – I don’t think oil will ever close below $120 again, let alone $100.)

For me, the most convincing argument for oil pricing holding at current levels and/or climbing even higher centers around the two most recent asset bubbles – the tech stock bubble of the late 1990s/early 2000s and the currently unwinding housing bubble. Let me try to explain:

In both the tech and housing bubbles, asset prices obviously ended up much higher than the asset’s underlying value. Whether it was the thought of future earnings, or a product of creative financing/overpriced appraisals, the prices for both tech stocks and homes became completely out of whack with historical levels. At some point, things were bound to correct.

Now, there are plenty of people who are arguing the same thing about oil prices – there hasn’t been a dramatic shift in supply/demand and the falling value of the dollar has artificially propped up. While this may be true, there’s another, much more significant factor that needs to be taken into account:

OIL IS A FINITE SUBSTANCE. WE CAN’T CREATE ANY MORE AND EVERY DROP WE USE REDUCES THE AMOUNT WE HAVE LEFT.

The reason stated above is what I believe has caused the dramatic spike in oil prices. We’ve simply come to realize that we are quickly closing upon peak oil and there is a premium to be paid for that. This problem is never going to go away and will only get worse the further along we move into the future.

This is why I’m on the side of the 59% of readers who believe the days of sub-$100 oil are gone forever.

Out of Oil? Welcome to the Brave New World.

Unless you’ve been able to avoid the news for the last two years, you’re probably well aware of the fact that the price of crude oil has been on a strong and steady climb.

While there are some economists who claim that the major factors behind the dramatic increase in price are a weak dollar and out of control commodity traders, a vast majority of economists, ecologists and every day people are worried that the real answer is much simpler: we can’t produce enough oil to meet current demand and we’re quickly draining what supplies we have left.

Thanks to the industrialization of the two most populated countries in the world – China and India – the world-wide demand for oil and petroleum based products has soared over the past decade. Unfortunately, since oil is a finite commodity (there’s only so much left in the world, not to mention the fact that there isn’t much, if any, excess refining capacity) this increased demand has done two distinct things:

  1. Driven the price of oil up nearly 75% in the last year alone
  2. Drastically reduced the amount of the world’s remaining supply of oil

While I’m sure there are plenty of very educated people out there who have a pretty good idea how much oil is left, it seems that considering the wide range of time frames being given, it seems that even most people “in the know” are just guessing. So, I figured why not give Daily Fuel Economy Tip readers a chance to guess as well?!?

About a week ago I put up a poll which asked: “When do you think the world will run out of oil?” Well over 200 people responded, and this is what they had to say:

  • 38% said we will run out of oil in more than 100 years
  • 23% said we will run out of oil in less than 25 years
  • 18% said we will run out of oil in 26 to 50 years
  • 13% said we will run out of oil in 51 to 75 years
  • 8% said we will run out of oil in 76 to 100 years

It certainly seems like there’s a pretty good split between those who think we have some time (38% for 100 + years) and those of us who think time is running out (41% for less than 50 years). It seems us common folk can do about as good of a job predicting future oil supplies as the so called “experts.”

Unfortunately, since most of the world’s expansion over the last 50 years can be directly attributed to cheap energy (specifically cheap oil) it really does feel as if we are on the cusp of a Brave New World. Will we experience hyper-inflation on everything from fuel to food? Will things like transcontinental flights be a thing of the past? Will we begin to see a gradual decrease in the world’s population?

I know that many of these questions seem rather absurd, especially when they’re looked at in the context of “the here and now.” However, when taking the long-term view, it’s actually very easy to see the world coming to a grinding halt thanks to a significant decline in the availability of oil. The reason being, less oil will have an enormous trickle-down effect.

Just look at the following examples of what could happen due to higher oil prices:

  • Obviously, the price of most forms of energy will go through the roof. The price of all transportation fuels will skyrocket. In order to help combat these increased costs, people will become more urbanized and things like the suburbs will become a thing of the past.
  • High transportation costs will cause a dramatic trickle-down effect on consumer prices as manufacturers have no choice to pass on the costs to their customers. No consumer product will be safe.
  • Any petroleum based product (plastic anyone?) will undergo significant price increases. Do yourself a favor and try and pick out even one item near you that neither contains plastic nor was produced by anything containing plastic.
  • As oil prices increase, there will be greater emphasis placed on bringing alternative fuels to the market. Right now, it appears our main efforts are being focused on ethanol. As farmers focus more of their efforts on producing ethanol producing plants, the price of these plants, as well as the prices of every other fruit/vegetable/dairy/poultry/beef/pork product will climb exponentially higher.

These likely scenarios just scratch the surface, and don’t even begin to speak to the increased conflict over the world’s remaining oil supplies.

But, so I don’t end this post on such a gloom and doom note, it does appear that there is reason to be thankful for the recent run of gasoline and oil prices, as there now appears to be much more focus on finding cheap, clean and sustainable alternative fuel sources. As these fuels/energies become more mainstream, hopefully they will reduce our demand for oil to the point that we don’t even care how much petroleum is left in the earth.

Gas Above $3.50, Oil Nears $120

The price of oil and gasoline continue to hit record highs with each passing day and, unfortunately, it doesn’t appear as if there is any possibility of relief in the near future.

Today, the price of a barrel of crude oil closed at nearly $120, while the price of a gallon of regular unleaded gasoline climbed over to over $3.53.

At this point last year, the national average price for a gallon of regular unleaded gasoline was at $2.86, or roughly 19% less than today’s average. Even last month, the national average price was “only” $3.25 a gallon, or roughly 8% less.

According to GasBuddy.com, New Jersey currently has the lowest state-wide average price for a gallon of regular unleaded gasoline at $3.33, while California is reporting the highest state-wide average price at nearly $3.88 a gallon. At this rate, it should only be a matter of days before we have the first $4 a gallon state-wide average gasoline price.

Obviously, this isn’t exactly the world’s greatest news, especially considering the current state of our economy. So, since may of us are trying to figure out where gas prices are going to go from here. According to many pundits, we will apparently avoid $4 gas this summer, however, I don’t buy it.

In order to try and prove this people wrong, I used some historical data and some simple logic to see if we will in fact avoid the dreaded $4 gas scenario. Essentially, I took a look at where we were at this point last year – $2.86 a gallon – and compared that number to where gas prices topped out last summer – $3.24 a gallon. In turn, by doing some simple math, I figured that gas prices jumped over 14% during that period.

Assuming the same were to happen this summer (and even this may be wishful thinking), we should expect gasoline prices to hit no less than $3.99 this summer.

I realize this is a very simplistic look at where prices may end up, but I think it does go to show that it’s not going to take much to get us to that $4 barrier. And considering we’ve never gotten back below the $2 barrier, we should probably come to the realization that, at the very least, $3 gas is here for good.

Regardless, all signs are clearly pointing to a very expensive summer vacation season, so hopefully you’ve been practicing your gas saving driving habits!

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