Apr

Gas to Hit $7 a Gallon

Posted by admin Published in Auto Blog, Auto News

Both Qatar’s oil minister and the head of OPEC can see oil hitting $200 a barrel before the end of the year and one analyst says gas could reach $7 a gallon within four years. That could mean cataclysm for the global economy.

The world got a little relief nowadays when BP reopened its North Sea pipeline. But the price of gas is averaging $3.60 a gallon and the price of oil is flirting with $120 a barrel with no relief in sight. Market forces don’t seem to be functioning in their normal order. OPEC controls only about half of the world’s oil supply. Ordinarily, when prices spike skyward, the world’s non-cartel spigots open wide. Why isn’t that happening and who’s to blame?

Oil Companies. Admittedly, obscenely compensated oil executives are laying low these days. Big Oil is rolling in profits.
The Bush Administration’s tax subsidies to oil companies, which were
intended to prod exploration, should infuriate commuters. And yet the profit margins of
oil giants are only slightly higher than the average for the S&P
500. And much of the wealth from these companies is pumped back into
the economy in dividends, employment, capital spending and the like.
Big Oil shouldn’t get a walk (and windfall profit taxes manufacture more sense
than ever). But it’s only a small part of the problem.

China and India. It seems to be a global fact that an automobile signals your arrival into the middle lesson. Without question, demand for oil in these countries
is putting an inexorable upward push on gas prices. that isn’t going to
change in your lifetime, and it should sound the alarm for North
Americans and Europeans that their middle-class lives will be
threatened unless they develop alternative forms of energy–fast. But
the increasing demand for oil in China and India is a long-term
trajectory. It doesn’t explain recent spikes. And in the short term,
it’s self correcting. As oil prices spike, economies slow and the
demand for oil eases. So does its price.

Ben Bernanke. Oil is currently priced in U.S. dollars.

The Federal Reserve has feverishly tried to calm credit markets in recent months with lower interest rates, which are a kind of Valium for bankers. As interest rates drop, so does the value of the dollar. So it takes more dollars to buy a barrel of oil. Without question, the credit crisis is a more urgent concern than high gas prices. Credit, after all, is the life blood of an economy. It is widely expected that tomorrow the Fed will reduce interest rates again. But many analysts believe that is the final cut we’ll see for a while. Fighting inflation–including rising gasoline prices–is fitting a precedence. When interest rates start inching up again, it will be not good news whether you’re taking out a car loan, good news at the pump. In the meanwhile, just be glad you don’t have Ben Bernanke’s job.

Speculators. It’s never a good omen when fear swallows reason on the trading floor. But that seems to explain part of what’s happening with the price of oil. Or possibly it’s just greed. Whatever. The good news is that these speculative frenzies tend to end quickly. And ultimately, it’s traders’ fingers that get burned, not consumers’.

Suppliers. Here’s the mysterious lost piece in high gas prices: Saudi Arabia, Kuwait, Qatar and other OPEC members try to keep supplies tight and prices high. But England, Norway, Russia and other non-OPEC countries open the spigots to take advantage of high prices. that normally brings prices down. But supply disruptions have become rife–even with OPEC countries, such as Nigeria, thanks to an insurgency that keeps shutting down its pipeline. Norway’s production has dropped by 25% since its peak in 2001. Britain’s has dropped by 43%. Alaska’s Prudhoe Bay has dropped by 65% from its peak. Russia’s is down and so is Mexico’s. It’s decent to form you think speculators are on to something. When does fear resemble reason?

Photo by John Perkins.

Original post by Marty Jerome