Oil Above $78, Gasoline $1 Higher Than 12 Months Ago

Due to falling reserves, a slightly weaker dollar, and belief in the economic recovery, the price of oil has climbed to over $78 per barrel, which is its highest price since December 1, when the price stood at just below $78.50.

In turn, there has been slight pressure on the price of gasoline, which is up two cents for the week and now stands at $2.61 per gallon. There is usually a little bit of a lag between when swings in the price of oil hit the price of gasoline, so there will likely be a slight jump in the price of gasoline over the coming weeks.

Over the past month, the price of gasoline has moved in a very narrow range between $2.58 and $2.64 per gallon.

While this is certainly welcome news to cash-strapped consumer, the jump in the price of gasoline over the past year certainly is not. The price of gasoline is now $1 – or 62% – higher than it was at this time last year.

Currently, only Alaska ($3.77) and Hawaii ($3.68) are reporting state-wide average gasoline prices above $3 per gallon, while 14 states are reporting an average price below $2.50 per gallon. Missouri has the lowest average gasoline price in the United States at $2.41 per gallon.

Connecticut is First $4 Gas State

For the first time in history, America has a state with an average gasoline price above $4 per gallon. To the surprise of many, the first state to $4 wasn’t California, or even another West Coast state – instead, the dubious honor of being the first state with $4 gas goes to Connecticut.

According to state-wide figures posted on GasBuddy.com, Connecticut first crossed the $4.00 threshold shortly before noon this morning. Since then, the price has fallen back to $3.99 a gallon. For basis of comparison, Wyoming currently has the nation’s lowest state-wide average price at $3.48 per gallon.

Based on the recent spike in oil prices (up 8% last week) and the subsequent jump in gas prices, it appears as if the rest of the country won’t be too far behind Connecticut in crossing the $4 mark. Currently, the national average gas price is up to $3.73 a gallon, which is 64 cents – or 21% – higher than at the same point last year, and there are now ten states reporting prices in excess of $3.80.

For as bad as things may look right now, there’s a slight possibility that gas prices may not climb too much higher than current levels, due in large part to the strengthening of the dollar.

For those of you who don’t know, most commodities (oil included) are priced in U.S. dollars. Over the last year or so – and particularly the last six months – the value of the dollar in comparison to other currencies has fallen rather swiftly. In order to maintain a steady value, these dollar based commodities had to command a more dollars.

Throw in much higher worldwide demand – which would drive up the price regardless of the strength of the dollar – and it’s easy to see why the price of oil is up nearly twofold over the last year. In turn, this has pushed our gasoline prices to the record highs we experience with each passing day.

Unfortunately, since the increased demand isn’t going to go away without a catastrophic worldwide economic collapse, it looks like our only hope significantly lower oil and gasoline prices is a significantly stronger dollar. While it’s tough to envision a scenario where the dollar completely rebounds, it’s not out of the question for the dollar to have already bottomed out.

Considering the fact that the Federal Reserve is likely done cutting interest rates – and may be forced to begin raising rates should inflation get much worse – and our counterparts across the pond have yet to start cutting – something many economists are predicting will happen in the second half of 2008 – it appears as if the stage is set for the dollar to begin to gather some positive momentum.

Hopefully, in turn, this will lead to lower commodity and gasoline prices.

But… I wouldn’t start holding my breath just yet!

Who Do We Blame for High Gasoline Prices?

As gasoline prices have increased over the last several years – for example, right now gas prices are 19% higher than what they were one year ago – many Americans have searched high and low to pinpoint who or what is to blame.

Is it the evil empire of Big Oil? The Bush Administration and their policies? The growing economies of China and India? Something else? All of the above?

Obviously, this isn’t a clear cut issue, and there isn’t one thing in particular to blame. This is a very complex and integrated problem with plenty of moving parts. However, it’s very likely that there’s one reason that’s more at fault than any of the others.

With that in mind, I wanted to see who or what we blame the most for the run of record gasoline prices. To see what people thought, I recently had a poll up on Daily Fuel Economy Tip which asked: “Who/what do you blame most for record high gasoline prices?” Here’s how people responded:

  • 41% blame the Bush Administration
  • 17% blame “Big Oil”
  • 15% blame supply and demand
  • 13% blame commodity traders
  • 6% blame OPEC
  • 5% blame China/India
  • 3% blame “other”

While I expected a lot people to blame the Bush Administration, I really had no idea it would be nearly half of the nearly 200 respondents. Maybe it’s their disenchantment with the administration’s policies, the current economic situation, the fact that Bush was an “oil man” and still has ties to the industry, or a combination of these and other factors.

While I think these are mostly circumstantial arguments, I guess when you combine everything together, it may provide a somewhat compelling argument. Unfortunately, I don’t buy it. (For the record, I would consider myself a moderate that leans towards the liberal side. Whatever that means.)

Not to discount nearly half of the respondents, but I generally it very hard to believe that the current administration is behind this. Why would the President of the United States deliberately direct policy that is clearly harmful to the U.S. and world wide economies? I can understand being unhappy with current administration, but blaming them for record high gasoline prices seems to be a pretty big stretch.

I think the people who blame supply and demand as the major factor behind the rise in gasoline prices are probably much closer to the actual answer. Over the last several years, as developing nations have become more industrialized, demand for petroleum and petroleum based products (such as gasoline) has increased dramatically. Because there’s only so much oil to go around, and because of a significant decrease in refinery output due to razor thin profit margins, simple economic theory has to take over:

As demand for a product increases while supply of the product decreases, the price will naturally trend upwards.

Maybe I’m just completely naive and the conspiracy theorists are correct, but I just have a very difficult time getting my head around the idea that this is more than a basic economic issue.

Sub-$3 Gas, We Hardly Knew You

So much for the national average price of gasoline being able to stay under $3 for an extended period of time.

Thanks to another run-up in the price of crude oil, as well as an unexpectedly high decrease in the U.S.’s gasoline inventories, the national average price for a gallon of regular unleaded gasoline has jumped to $3.05, nearly seven cents higher than a week ago. Last year at this time, the gasoline was at $2.32 per gallon.

Colorado is reporting the lowest state-wide average gasoline price at $2.80, while Hawaii is reporting the highest state-wide average gasoline price at $3.55.

As the price of crude oil began to fall in December (dropping nearly 12% from its peak) there was increased hope that there would be a nearly equal drop in the price of gasoline. Unfortunately, as the price of gasoline began to ease, it’s descent was slowed, and ultimately reversed, by a rebound in crude oil.

Unfortunately, we should probably get used to more frequent ebbs and flows in gasoline prices, thanks to the fairly strong “Catch 22” relationship between the United States’ economy and the price of crude oil.

What I mean by this is as the price of crude oil goes up, there is fear of economic slow down in the U.S., which would likely cause us to have a lower demand for oil. In turn, this causes the price of crude oil to fall. But, as crude oil falls, the threat to the U.S. economy is lessened, which subsequently causes the price of crude oil to slowly tick upwards.

Granted, this is a pretty simplistic view, especially considering there are many other factors behind the price of crude oil. That being said, considering the United States still has the world’s largest economy (thus is still the largest consumer of oil), the U.S. economy is one of the main driving factors behind the price of crude oil.

Long story short, get ready for more of the same.

Happy New Year.

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