Gasoline Prices Poised to Jump

By Brendan MooreTwo things happened this morning: Oil futures prices went past $98 a barrel, which was not a positive development, and the Paris-based International Energy Agency’s long-term forecast was released, and it isn’t pretty.

If you read the 12-page PDF (click on “English” in the drop-down box), you will note that China and India are not expected to stop growing and therefore neither will demand. Peruse the report and you’ll notice that if each country continues on their respective energy-consuming trend line, “the world’s energy needs would be well over 50% higher in 2030 than today,” the IEA states.

This little nugget is in there, too: “The staggering pace of Chinese and Indian economic growth in the past few years, outstripping that of all other major countries, has pushed up sharply their energy needs, a growing share of which has to be imported”. That means that competition for oil is going to become much fiercer, which signals that oil at $125 a barrel is not very far away.

When oil rises in price, gasoline follows.

Light, sweet crude oil for December delivery settled up $2.72, or 2.9%, at $96.70 a barrel on the New York Mercantile Exchange yesterday. That brings it very close to the inflation-adjusted high of $101.70 seen in April, 1980.

The retail price of gasoline is starting to climb, and consumers have noticed, with consumption of gasoline dropping over the last four weeks. But demand always goes up during the holidays and so does the demand for heating oil, which subtracts from the amount of oil used to produce gasoline. Currently gasoline demand accounts for nearly 50% of the average daily U.S. consumption of 20.9 million barrels of oil.

Gasoline is going to go up; the only question is how much. Will we be at $3.50 a gallon for regular unleaded by January or will it take until the summer months? Or will it be a higher number, say, $4.00 a gallon? What happens if the U.S. and Iran get into a shooting war? Are we looking at $5.00 a gallon this summer?

Looking past 2008 and what might happen, what will prices be in 2009 if nothing happens except for what is happening now, that is; the world just keeps using more oil and known oil supplies keep diminishing?

I can’t answer the question of how much gasoline will cost here in the U.S. in the future, but at this point it seems unreasonable to expect that we will ever have cheap gas again. From my point of view, you may wish to plan accordingly vis-à-vis your next choice of car and your next place of residence (closer to work, maybe).

But, there is not a lot of evidence that Americans are reconsidering their choices of what to drive and how close to work they should live. Why? Well, most Americans complain about the price of gasoline, but they can afford to pay the higher price at the pump. Americans, for the most part, have more money, even after adjusting for inflation, than they did in 1980. Even though we have a great many people still using their SUV or their almost-as-big crossover as a commuter car, the average American spends only 3.5% of his/her personal income on gasoline expenditures, compared to 5% in 1981. That’s not a big chunk of the average income. A switch to a car that gets 30 mpg from a 15 mpg vehicle is not going to move the needle that much in terms of percentage outlay for most Americans, at least not at current gas prices. The calculus changes at $5 a gallon, but we’re not there yet and American consumers tend to react to pricing of energy as opposed to planning for it.

One more thing: the dollar is getting battered in the currency markets globally over the last year, and when the dollar gets weaker against other currencies, it costs even more dollars to compete in the world energy markets when buying a barrel of oil. It could be an expensive 2008 calendar year.

COPYRIGHT Autosavant.net – All Rights Reserved

11.07.2007

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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10 Comments

  1. You said it yourself, Americans react to high energy prices, they don’t plan ahead for them. What do you expect? DUH!!!!!

  2. We can make all the ethanol we need in America and then tell the people with oil to go to hell.

    Our farmers will save us, just like they helped save us during WWII.

  3. We really need to take another long look at nuclear power again. We can get all the electricity we need from safe nuclear power plants and with battery technology getting so much better, go to EVs (electric vehicles). I know people are afraid of nuclear power but they’re afraid of reezing to death during winter, too.

  4. Chevrolet Volt is my answer. I’m getting one when they come out. Will take car of my commute with plenty of juice to spare.

  5. Here’s something we could do right now: CONSERVE.

    It doesn’t require new infrastructure, new technology, doesn’t produce different pollutants, etc. and produces immediate results.

    That a pretty big DUH, duh?

  6. The U.S. imports about 12 million barrels of oil PER DAY.

    The U.S. produces about 500,000 barrels of ethanol per day.

    Ethanol production is about 4% of the amount of oil we import.

    Ethanol production is about 2.5% of the amount of oil we consume every day (20 million barrels per day).

    Ethanol has 34% less energy than gasoline.

    The notion that we can produce enough ethanol to significantly reduce our dependance on fossil fuels is pure fantasy.

    Ethanol is just one source of our energy. A very small source.

  7. Yeah where is all that oil from Iraq? I thought we were supposed to be swimming in it because we would be getting a torrent of supply from our new Iraqi friends after we liberated them.

  8. I have to commute and if I have to get a more fuel efficient car I would consider the Chevy Volt. You would never catch me dead in a Toyota, especially the Prius.

  9. Well I live outside the city so I will have to commute. I guess if gas is $5 a gallon by 2010 I will be buying a Chevy Volt. Never catch me dead in a Toyota, especially a Prius. I get to help an American company and at the same time help America by using less fuel.

  10. This is something poor people or socialists need to worry about, the same poor people and socialists that want to mandate what I should drive and are jealous of me for being able to drive something big and luxurious. It’s not something I worry about.

    After reading this article, all I really want to do is get in my leather-lined full-size SUV and joy-ride around for hours while smoking a cigar and listening to Rush on my satellite radio, so that’s what I’m going to do.

    All of you should try it because it’s a great stress reliever.

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