Gas Prices: Three Reasons They’re Likely to Go Up

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PainAtThePump

Did you think you were getting off easy at the gas pump recently? Probably not, but compared to the alternative—you were. And now, according to industry experts, those (relatively) happy days are about to end as energy prices look likely to spike higher.

With a weak domestic economy, major fiscal issues still unsolved, Chinese growth slowing, and Europe officially in recession, consumers will also have to contend with increased pain at the pump. Why?

Three Reasons Gas Prices are Likely to Jump

  • American oversupply is coming to an end: You might’ve heard about increased U.S. and North American oil production coming largely from shale rock development. The sudden glut on the supply side caused a big disparity between crude oil prices here, (mainly based on the West Texas Intermediate—WTI—benchmark, as measured in Cushing, Oklahoma) and in Europe (Brent crude). The difference, per barrel, has reached $22, as Brent trades around $108—but that gap is about to narrow and drive prices up. With increased pipeline capacity coming on-line and storage capacity increasing, the oversupply will go from 350,000 excess barrels per day now, to almost zero in 2013, and then onto a 300,000 barrel-per-day deficit in 2014.

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  • Washington’s cheap-money policies may ‘come home to roost’: Inflation can greatly affect crude prices. Because the economy’s growth rate has been so low, inflation has been mostly kept in check. But with the Federal Reserve eyeing a fourth Quantitative Easing policy (QE4—it’s starting to resemble Hollywood horror movie sequels!), newly printed money will be used to buy up long-term bonds, replacing the previous policy of selling short-term bonds to buy the long-term bonds. Our right hand is, essentially, borrowing from our left hand. In the last fiscal quarter, the Gross Domestic Product (GDP) Price Index started swelling to a 3% yearly rate. QE4, once announced, would likely send crude prices higher, as well as prices on just about everything else that relies on oil and gas to move around a modern economy.
  • Investors used the dollar as a safe-haven—but oil may be the new play: With all the volatility in the markets, global investors have been storing their money in perceived ‘safer’ assets like the U.S. Dollar. This has resulted in a stronger American currency that, in turn, has held down crude prices—the dollar is the predominant currency used in the global energy market. But with new Federal Reserve easing plans and a new Chinese government that appears less inclined to prop up the dollar in order to keep its currency artificially low and liquid, the dollar will look less and less like a safe haven and oil will look better and better. A weaker dollar, by definition, buys less—and when coupled with higher demand for oil commodities, a price increase almost necessarily follows.

And these three are just the structural challenges to domestic crude oil prices, so to speak—to say nothing of growing turmoil in the Middle East and potential U.S. progress on ‘Fiscal Cliff’ issues.

There’s a Catch-22-style Irony to Gas Prices

While the price at the pump in individual U.S. markets fluctuates up and down a few cents from day-to-day, in the last few years, nationwide, it’s nearly doubled. Still, prices have been held lower than they could’ve been thanks to a limping economy and a sudden abundance of crude development here at home.

Depressed demand and increased supply typically mean lower prices—even if ‘lower’ is an entirely relative term.

But when the economy picks up a little, gas prices tend to increase along with it—but that, in turn, typically saps the economy of its momentum. The term ‘vicious cycle’ may be grossly overused in popular culture, but in terms of oil, it seems to apply.

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What do you think–will higher gas prices sap any momentum the economy has? Is it affecting your household budget or plans for the future?