The U.S. national average price per gallon of regular gasoline is $3.38 according to AAA’s Daily Fuel Gauge Report. While this is only 28 cents more expensive than this time last year, analysts warn that the pump price is going to increase rapidly. How much are you prepared to pay before taking action?
Why Is Gasoline So Expensive?
It all comes back to the price of oil. There are several factors that impact the price of this finite commodity: supply, demand, production costs, and uncertainty are significant.
It’s more difficult each year to supply world markets with crude. Lower supply increases prices. Without launching into a lengthy Peak Oil debate, it’s reasonable to say that the supply of oil is tight. Production has exceeded the rate of new discoveries for decades. Each well has a life-cycle and experience shows that the rate of production decreases by 4-8% per year as the resource is depleted, and this can be extrapolated over the entire global resource.
Demand has been lower each year since the peak in average production of 86 million barrels per day in 2007. Lower demand decreases prices. The U.S. is by far the worlds largest consumer of crude and petroleum products. Following the oil price spike to $147 per barrel in 2008 and the subsequent recession, there has been downward pressure on oil demand. Higher prices pushed people to conserve more and switch to alternatives. Lower economic activity also reduced demand.
However, developing nations like Russia, Brazil, China, and India are keen to purchase any surplus world production to drive rapid economic growth.
Global uncertainty pushes crude prices higher. The speculation of possible disruptions to supply is enough to spin up crude prices. Tensions with Iran, conflict in Nigeria, and management issues in Venezuela are examples of problematic regions that make investors nervous. Stability is essential.
Up or Down?
From my completely unqualified position, I can only see upward pressure on the price of oil, and the price we subsequently pay for gasoline. If our economy strengthens, increased demand will put upward pressure on prices. If there is any hostile engagement with Iran over the Strait of Hormuz, or other concerns, this will put upward pressure on prices. If there is a supply crunch, prices will increase. The cost of extracting crude is also increasing the floor at which producers are willing to sell. Fox news reported this week that Russia needs crude to be priced above $110 per barrel to ensure a viable operation. Brent Crude is currently priced at $110.61. Coincidence?
Gasoline Is Expensive
Gasoline is already very expensive. At today’s prices it doesn’t shock us to fill-up like it did in 2008. The persistently high prices have numbed us into thinking there’s nothing we can do other than keep paying for it. However, average household expenditures on gasoline were $2,900 in 2011. That’s a significant expense that I’m sure most people would prefer to do without.
At what point will you seek alternatives to burning gasoline? Will $4 per gallon force you to take action? Maybe you’ll wait until $5? What are you prepared to do? Thankfully there is no shortage of creative ways to conserve what we have and find alternatives to moving around.
What’s Your 2012 Peak Gas Price Prediction? GasBuddy forecasts a national average peak price of $4.15 in May 2012. I’m going to take it a little further and predict a national average peak $4.75 sometime this year.
Please have your say:
Financially Consumed 2012 Gas Price Poll*
* National U.S. Average Price per Gallon of regular gasoline.
I look forward to sharing your predictions in another post later this month. Towards the end of 2012 we’ll re-visit the poll results and see how close the group consensus was to reality.
I’m going to go out on a limb and predict we have some sort of crisis (Iran?) that raises the price of gas even higher My guess: $4.96
That’s a bold prediction. Let’s see how the year develops, there’s so many moving parts.
The poll wasn’t showing correctly when you made your comment. I’ll go ahead and record your prediction.
I’d say $4.50 this summer. It’s going to be painful all across the board and the price of everything will go up. That’s one reason why I would like to buy some energy stock now. I’m looking at CVX and Royal Dutch Shell. What do you think we can do to lessen the pain?
There’s a number of ways to answer your question as to what will lessen the pain. I’m going to approach this from a personal finance perspective.
The immediate impact on rising gas prices is the added cost to fuel the vehicle. Taking conservation steps to reduce the amount of driving you do is the first logical move. Ride a bike, car pool, combine trips, and so many more. Taking this a step further, you can ditch the gasoline powered car and go electric. If gas does tak-off we’ll all be wishing we lived in walkable cities.
Beyond this, everything that is produced and distributed with petrochemicals is going to become more expensive. Petroleum is used to make thousands of products. Because we’re so dependent there’s not much we can do to avoid this gas induced inflation. There will be a greater emphasis on buying local and building community ties. Barter is one way to side-step inflation.
While our economy is entirely dependent on oil, we are vulnerable. Transportation is just the obvious first step we can take to remove this direct expense from our household budgets.
Before a price spike, I recommed lobbying your local government to create a bicycle friendly transportation infrastructure.
I plan to cut gasoline consumption as soon as the weather warms up. Now, I drive baby to daycare and when it’s a bit nicer, we’ll go back to taking public transport. I’ll ride the bike more next year too.
Glad I already own some oil stock!
Good for you Marie. Hope you have a profitable year.
We’re already doing our best to drive less, aside from husband’s commute. I don’t want the prices to go any higher, but they will—just to give me a hard time. *using a whiny tone, not self-centered*
In the short-term driving less is all most of us can do. If you’re not ready to switch to a more fuel efficient vehicle, then you’re sabotaging your finances by switching cars too soon.
You’re not whiny!
I hope gas prices go to 6 dollars. This will spur innovation and higher fuel vehicles. Since, gas went high to about 5 bucks before did you see how many 40mpg cars suddenly were created? I’m all for temporary high gas prices.
I’m ok with high gas prices also, as long as it doesn’t crush the economy. Higher gas prices are required to switch to alternatives, conserve, and spur innovation. The faster we do this the less dependent the economy is on oil price fluctuations. I think we’re going to see some serious volatility this year.
I do expect some increase, but not a crazy increase like what we saw a few years back.
What’s your prediction MC?
I’m going with sharp increase. I could be wrong, and I’m gauging it to where I live (where it’s pushing $3.70 already). I’m going to guess it will go up close to 30-cents. I guess I’ll be riding my bike even more.
I’ll be riding my bike more too
I still have clear memories of paying $4.99 per gallon in California as I drove my family from west to east coast during peak gas prices in 2008. I never want to buy another gasoline powered car.
I honestly couldn’t begin to predict where the price of gas is going to go, but where I live, it would be almost impossible to do anything about it. If I were to attempt public transportation, It would literally take more travel time than the savings would be worth.
Maybe this will push some of those physicists to move their asses on developing a transporter machine
Haha, now you’re talking! Beam me up, and to the office, Scottie.
It’s funny…a client came into the office this morning and I told him the area where I lived and he’s like “no wonder you hate coming here, I’d hate it too if had to make that drive”
If we see some action in the Strait of Hormuz with Iran, I can see big trouble ahead. Thankfully I no longer have to commute 90 miles each day to work.
Another reason to plow ahead with debt payoff.
Good point Joh. I think it’s smart to have an eye to the future and plan for dire economic conditions. It could happen.
I am going to predict a strong increase. Food and gas has already been going up and I see that continuing. My hope is that this pushes governments and consumers to start exploring alternative ways of getting around and generating power.
We need more alternatives, and each needs to be further developed. We need electric cars with 300 mile ranges and not just 80-100.
Agreed. We need practical and useful technology.
ahh i remember when it was $1 a gallon back in 2001, good old days… I believe oil companies will slowly raise the price of gas until the public has had enough. That’s when other fuel alternatives will begin to become mainstream. Until then, they will milk as much profit as they can. Just my opinion
Yes, the entire oil distribution system is trying to charge as much as possible. Why wouldn’t they? I think they charge whatever they can, simultaneously ensuring economic growth is stable. Blowouts lead to recessions and lower demand and lower prices.
Gas is so expensive we should all be outraged and take immediate action to move away from it.
Hard to predict oil shocks, but it’s a general upward trend. Major oil fields are getting harder to discover. Supergiant oil fields like Saudi Arabia’s Ghawar are a thing of the past. When there are large discoveries, they come with significant technical challenges, such as the sub-salt ultra-deep fields off Brazil.
So sure, the price of gasoline *is* going up long term. How fast is a guessing game.
When Saudi Arabia announces that Ghawar is in serious decline I think we can then expect prices to race away. It’s all a guessing game. What will interest rates do tomorrow, how will the market perform this year, how will US inflation compare to other countries over the next 7 years.
When will the energy required to produce a barrel of oil be greater than that barrel? So many questions.
I think we will see a pretty sharp increase up to $4.00/gallon. But the thing is that we pay $1.50-$2.00 for 16oz of bottled spring water, so $4.00/gallon does sound that bad to me because it can take you 25 miles or so… Water is free and I am somehow willing to pay for it in a bottle. sort of crazy…
Consumers pay these crazy prices because marketers tell them that it’s ok to spend their money this way. They see everyone else doing it, so they think that is the acceptable way to live.
Great point about the current pricing numbing us to higher prices. My company is offering money if we setup a carpool or use public transportation. Need to check my commute route again. Thanks!
Interesting poll. I’m sure it will go up, but the degree is uncertain. I hope it’s not a significant amount from where it is now.
Thanks for sharing the post here. Gasoline has been very expensive. I would like to spend as less as possible. Mora than that I would like to save the usage of Gasoline.
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