What’s Up With Gas Prices?

I don’t know about you, but lately, when I pull into the gas station to refuel my car, I get really grumpy. How can gas prices be so high? What’s up with gas prices? And why is it that when crude oil prices increase, our gas prices seem to immediately jump higher, but when crude oil prices fall, it takes forever for gas prices to come back down?

Well, I’ll tell you, it is a complicated picture and there is some price gouging going on as I’ll show you in a minute. Anything to do with economics seems complicated because there are so many variables that come into play, but for today let’s look at some simple reasons why crude oil prices and in turn, gas prices have been going up.

Supply and Demand

It’s the old supply and demand game. If more people need gas to power their cars, prices tend to rise. In a world with unlimited resources, this increase in price would cause an increase in supply through increased exploration, increased production, or both. The result would be that eventually, prices would stabilize.

We, however, do not live in a world of unlimited resources. We are using up our crude oil supplies at a rate of 84.3 million barrels per day. That’s a lot of oil. What’s more, China’s demand for oil is expected to grow by 100,000 to 500,000 barrels per day this year. And China is just getting started. They currently have about 20 million cars on the road. In the next 15 years, that number is expected to top out at between 120 and 145 million cars. Where is all of that gas going to come from?

Now, you may be thinking or reading that OPEC is going to increase production and that they have adequate supplies to handle all of this grow. After all, that’s what the news media says on a regular basis, but the fact is, experts are telling a far different story. Matthew Simmons of Simmons and Simmons, Intl. (Click Here) and Kenneth Deffeyes, author of “Beyond Oil” believe that the world may hit peak oil this year. So what is peak oil? It is the point where total world oil production starts declining. Based on their latest research, all of the non-OPEC countries have reached peak oil and are in decline. OPEC may have less than one million barrels of capacity left before they hit peak oil. In fact, last weekend, Algeria’s minister for energy and mines said that OPEC had reached its limits.

So, from our brief study of economics what happens when demand increases (read Chinese), and supply decreases, (peak oil)? That’s right! Prices increase. See this economics stuff isn’t hard. Forbes Magazine reports that in the next 4 or 5 years, crude oil could hit $100 per barrel. Let’s see, oil at $53 per barrel equals gas at $2.25 per gallon, so oil at $100 would equal gas at almost $5.00 per gallon. Whew.

Recession Here We Come

You would not believe how many things in our every day lives are made out of or with oil. And how many more things are trucked, shipped, and delivered using oil. All of this points to increasing costs for just about everything we eat, wear, and use. When prices go up, total purchases go down and so does the economy. All the more reason to make sure your investment house is in order.