Gas Price Prediction for 2009: $6.00/gallon
As of the day that I write this, the national average price
for gasoline is $3.55 per gallon in the US. When gas was under
$1.00 I predicted that it would go to $3.00 per gallon. Here we
are with gasoline priced well over $3.00 per gallon, and I am
now convinced that the cost of gasoline will reach $6.00 per
gallon in the United States at some point during 2009.
There is not much that can be done to prevent that from
happening. To understand why, we need to look at the factors
that are the causes of the price rise. Basically there are
three: supply, demand, and the value of the currency.
It is mentioned repeatedly on the television financial news that
the price of crude oil will come down due to less demand in the
United States because of the current recession. However, that
view is incorrect. This is not the 1950's anymore. The United
States is not the dominant economy of the world. In fact, this
year for the very first time ever according to the International
Energy Agency (IEA), China, India, Russia, and parts of the
Middle East are expected to consume more oil daily than the US
will. 20.67 million barrels a day, an increase of 4.4%, to be
precise. The IEA predicts that U.S. demand will contract 2% to
20.38 million barrels daily.
Even if the US demand does contract 2% because of recession, the
BRIC countries (Brazil, Russia, India, and China) will continue
to consume ever increasing amounts of energy.
Demand is not going to fall, regardless of a US recession. But
what about supply?
Supply is near or at 100% of capacity. There is only so much
that can be pumped out of the ground. The amount of crude oil
that can be pumped daily out of the giant Cantarell oil field in
Mexico is declining rapidly. After peaking at 3.82 million
barrels per day in 2004, Mexico‘s total daily production is
falling by as much as 8% per year. North Sea oil output peaked
in 1999 at 2.91 million barrels per day. Daily production has
since fallen to 1.81 million barrels per day.
Here in the United States, our peak oil output came way back in
the year 1970, peaking at 11.34 million barrels per day. Most
recent figures show that oil output has fallen to under 7
million barrels per day. Russia peaked in 1987 at 11.45 million
barrels per day. Output has since fallen to slightly over 9
million barrels per day. Even Iran, the country with the third
largest oil reserves in the world, reached peak output back in
1974 at 6.02 million barrels per day. Output has fallen to 4.05
million barrels per day.
Not all countries have reached peak. Some analysts claim that
Saudi Arabia will not reach peak production for a few more
years, while others claim Saudi Arabia is at peak now.
Regardless of which analyst is correct, Saudi Arabia is getting
close to peak. Brazil, Venezuela, and Iraq have yet to reach
peak oil output. However, the amount of spare capacity available
in countries that have yet to reach peak oil production does not
exceed the declines experienced in countries experiencing
declining oil production.
The world is bumping up against peak oil production. We are
extracting oil about as fast as we can on a global basis. At
best, supply will remain constant for the next 4 to 8 years, at
which time daily global oil production will begin to decline.
While supply remains constant, demand continues to grow at a
steady pace. The financial news media in the US proudly
proclaims that a recession in the US will lower demand and cause
prices for crude oil to fall back to $60 to $70 per barrel. In
my opinion, that view is extremely naive and self-centered. The
US is not the only country in the world.
For decades, giant US corporations have been moving their
manufacturing plants to foreign countries to take advantage of
lower wage costs. Since the source of any country's wealth is
it's natural resources and manufacturing ability, all those
countries which have created manufacturing plants are now
becoming wealthy. Citizens of those countries are moving from
poverty to middle class. In the last 2 years alone Brazil has
lifted 20 million citizens from poverty to middle class. China
and India have done ten times that amount.
All these new middle class consumers want the lifestyle
enhancements common to the middle class: more meat in their
diets, better homes, and a means of personal transportation for
more distant and frequent travel. All of those require energy.
Global demand for energy is growing rapidly while global supply
remains constant. That's a recipe for higher prices.
If supply and demand figures were not enough to cause energy
prices to rise significantly, there is another factor as well:
the value of the US dollar.
The international value of the dollar has been declining for the
past few years. The decline is accelerating due to the
subprime
mortgage crisis. While this is a topic that requires
an entire article to itself, the short version is that the
Federal Reserve is diluting the value of the US dollar by
creating billions of dollars out of thin air in order to bail
out the giant Wall Street firms which have created a financial
quagmire with their
abuse of derivatives. While the subprime mortgage crisis is very serious, it pales
in size compared to the real financial crisis, which is a result
of artificial valuations of structured financial packages that
include trillions of dollars of derivatives.
The worlds financial system is freezing up and crumbling as a
result. The Federal Reserve has already stated in the recent
Bear Stearns case that these firms are too big to fail and will
be "rescued". They are too big to fail because of the derivative
contracts that they have issued. If one of these giant firms
fails, all of their derivative contracts also fail. That would
create a domino effect throughout the world, and the world's
financial system would instantly seize up. This is no small
matter.
The Federal Reserve has no choice but to continue to bail out
these firms. And the method of "rescue" is to create money out
of nothing and loan it into existence to these firms. 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 result is a constant diluting of the value of
the dollar.
The dilution of the US dollar has the potential to raise the
cost of gasoline to $10, $20, $50, $100, $1,000 or more per
gallon. It's called hyperinflation. That's not a joke, that is
reality. It happened in Germany in the 1920's to an extreme
degree. It has happened in more recent years in Argentina and
Zimbabwe.
Please understand that this is not a prediction of gasoline
reaching $1,000 per gallon. It is merely an acknowledgement that
if the dilution of the currency by creating too much of it
doesn’t stop, it could get that bad.
When currency is created out of nothing and injected into an
economy, it takes a while for the dilution process to occur. The
lag time is typically 5 to 8 months. Therefore, the money that
has already been created in the spring of this year will cause
the negative effects to be felt in the fall and winter of this
year.
More bailouts are coming, but I cannot accurately predict the
size and speed of those bailouts at this time. Therefore I do
not know how high gasoline and energy prices will go. It is a
matter of constant monitoring in order to view the current rate
of dilution of the currency, and forecasting the results 6 to 9
months into the future.
Based upon what is happening right now, $6.00 gasoline in the US
in 2009 is just about a shoe in.
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