As of the timeof this writing, the national average gas was under $1.00 the prediction was made by this author it would climb in price to $3.00 per gallon. Here we are with gasoline priced well above $3.00 per gallon, and I now predict that the price of gas will reach $6.00 per gallon in the United States in 2009.
Not much can be done to stop that from happening. To understand why, we need to look at the causes of the price rise. Basically there are three: supply, demand, and the value of the currency.
Supply is near or at 100% of capacity. There is only so much oil that can be pumped out of the ground. In recent years reductions in daily output have occurred in the United States, Mexico, Russia, Iran, Argentina, Peru, Columbia, Australia, Turkey, Libya, South Africa, Egypt, Spain, Algeria, France, Pakistan, Yemen, and a host of other countries.
However, not all countries have reached peak. Some analysts believe that Saudi Arabia will not reach peak production for a few more years, while others believe Saudi Arabia is at peak now. Regardless of which analyst is correct, Saudi Arabia is nearing peak. Brazil, Venezuela, and Iraq have yet to reach peak oil output. However, the amount of spare capacity in those countries yet to reach peak oil production does not exceed the declines experienced in countries experiencing declining oil production.
While supply remains constant, demand continues to grow at an alarming pace.
In the last 2 years alone, Brazil has lifted 20 million citizens from poverty to middle class. China and India have done ten times more. All these new middle class consumers want the lifestyle enhancements common to the middle class: more meat in their diets, improved homes, and a means of personal transportation for more distant and frequent travel. All of those items require more energy.
If supply and demand figures were not enough to cause energy prices to rise substantially, there is another factor as well: the value of the US dollar.
The world’s financial system is freezing up and crumbling as a result of the subprime mortgage crisis mixed in with derivatives abuse by Wall Street. The Federal Reserve has already stated in the recent Bear Stearns case that these corporations are too big to go under and will be “saved”. They are too big to fail because of the derivative packages that they have issued. If one of these huge firms goes under, all of their derivative contracts also fail. That would create a domino effect across the world, and the world’s financial system would instantly freeze up.
The Federal Reserve has no choice but to continue to bail out investment banks. And the system of “rescue” is to create money out of nothing and loan it into existence to these corporations. In the past several months alone, over a quarter of a trillion dollars have been created in bailout money in the United States. This will continue. The effect is a constant weaking of the value of the dollar.
When money is created out of nothing and injected into an economy, it takes a while for the watered down process to occur. The lag time is usually 5 to 8 months. Therefore, the money that has already been created in the spring of this year will cause the negative results to be felt in the fall and winter of this year.
Based upon what is unfolding right now, $6.00 gasoline in the US in 2009 is better than an even bet. What good is cheap auto insurance if you cannot afford to supply the fuel to drive your automobile?