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.