Why The Cost Of Gasoline Will Exceed $6.00 Per Gallon

As of the time of this writing, the national average cost for gasoline is $3.55 per gallon in the US. When gasonline was below $1.00 the forecast was made by this author it would go to $3.00 per gallon. Now we have gasoline priced well above $3.00 per gallon, and I am now convinced that the cost of gas will top $6.00 per gallon in the United States at some point during 2009.

Not much 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.

Supply is near or at 100% of capacity. There is only so much oil that can be pumped out of the ground. In recent years reductions in daily output have occurred in the United States, Russia, Mexico, Iran, Argentina, Peru, Columbia, Turkey, Australia, Libya, Egypt, South Africa, Spain, France, Algeria, Pakistan, Yemen, and several other countries.

However, not every country has reached peak oil production. 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 nearing peak oil production. 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.

While supply remains steady, demand continues to rise at an alarming rate.
In the last 2 years alone, Brazil has raised 20 million of it’s population from poverty to middle class. China and India have done ten times more. All these new middle class consumers desire 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 items require more energy.

If supply and demand were not enough to cause energy prices to rise significantly, there is another factor as well: the value of the US dollar.

The global financial system is ceasing to function properly as a result of the derivatives abuse mixed in with the subprime mortgage crisis. The Federal Reserve has already stated in the recent Bear Stearns situation that these firms are too big to fail and will be "rescued". They are too big to collapse because of the derivative packages that they have issued. If one of these giant firms fails, all of their derivative contracts also fail. That would cause a domino effect across the world, and the world's financial structure would instantly freeze up.

The Federal Reserve has no alternative but to continue to bail out investment banks. And the method of "rescue" is to create currency 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.

When money is created out of nothing and injected into an economy, it takes a while for the watered down process to occur. The lag time is typically 5 to 8 months. Therefore, the currency 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.

Based upon what is unfolding right now, $6.00 gasoline in the US in 2009 is greater than an even bet. What good is %LINK1% if you cannot afford to buy the gasoline to drive your car?

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J Stromsteen has many years experience in the finance, real estate, and insurance industry. Besides her own website, Cheap Auto Insurance, she contributes to the website Bush's Depression as well as first time home buyer to provide up to date information on the unfolding real estate and financial crisis.

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