A reader recently asked what happens if rising gas prices reach $5 a gallon? Good question.
If it does, that doesn't mean we will return to gas shortages and lines at the pump, like we did during the OPEC oil embargo, which started in the fall of 1973. U.S. oil imports went from 103 million barrels in November 1973 to 83 million barrels in December, reaching a low of 63 million barrels in February of 1974. This meant that there was not enough gasoline to meet demand, resulting in gas lines. (Source: EIA, U.S. Crude Oil Imports)
However, the high oil prices of today are not caused by a decrease in supply. In fact, oil imports have remained at a fairly steady 13 million barrels per day for the last four years.
Today's high oil prices have been caused by investors' fears about unrest in Libya, Egypt and Tunisia, as well as the ongoing dollar decline. First, since real estate values have declined, traders have switched in the last year into commodities such as gold and oil futures. This caused a bidding war, and a potential bubble. (See 2012 update in How High Will Gas Prices Go?
Gas prices have less to do with supply and demand, and more to do with commodities traders. Oil futures contracts are agreements to buy or sell oil at a specific date in the future at a specific price. Commodities traders look at projected supply and demand to help them decide how high to bid on oil futures prices. However, if all traders think the price of oil will be high, they can create a self-fulfilling prophecy by bidding up oil prices. This can create high oil prices even when there is plenty of supply on hand. Once this starts, other investors will bid on oil prices just like any other commodity, such as gold, creating an asset bubble.
Second, oil is priced in dollars, so OPEC needs to raise the price of oil to maintain its profit margins. The unrest in Tunisia, Egypt and now Libya has only given investors another reason to further bid up the price of oil. This is despite Saudi Arabia's ability to replace any oil lost during Libya's unrest.
What It Means to You
Rest assured, even if gas prices rose to $5 a gallon, they wouldn't stay there long. The Federal government has access to the Strategic Petroleum Reserves. It can release extra oil, if needed, to keep gas prices from skyrocketing. For example, it was used to keep prices from rising even higher after Hurricane Katrina. Gas prices rose $3 a gallon because Katrina affected 19% of the country's oil supply. Releases from the Strategic Petroleum Reserve helped prices quickly return to normal.
Tell us your opinion in What Should the Government Do About High Gas Prices?.
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Comments
John Hofmeister, founder and CEO of the non-profit group Citizens for AFFordable Energy and former CEO of Shell Oil, keeps sounding the alarm but no one seems to be listening. As recently as February 24 he appeared on Parker Spitzer saying what he has said before. In addition he said we have plenty of oil within the United States; we just don’t want to deal with the messy business of extraction.
Our president has acted ineffectively. He lacks the will to change American policies regarding pumping oil, building new refineries, or reducing consumption.
Too many of us are energy hogs, especially when it comes to our vehicles. Our vhicles are too large (gas hogs) and we drive too many unnecessary trips. Select a fuel effecient vehicle and plan your driving to be as efficient as possible. If you can’t afford to buy a new vehicle, make your present one as effecient as possible: inflate the tires to correct pressure, get a tune-up, accelerate moderately, adjust your speed when approaching redlights to avoid coming to a complete stop until the light changes to green, avoid high speed on the freeway and rapid passing acceleration, remove unnecessary weight, and avoid prolonged engine idling.
The upside of high fuel prices is it prompts us to be more efficient, which is good for our pocketbooks and the environment.
If the price of a commodity sky rockets, who benefits?
Commodities traders
It would be a good thing if our President would LEAD. I was excited about hope and change. Now I realize the change was higher energy prices. I saw him speak about having higher gas prices….he wanted them. We have been duped.
yeah, prez. Obama should lead like prez. bush did in summer 08, wave his “Magic Wand” oh forgot, “don’t have a magic wand”. since it is speculators and investors driving up gas prices, tax the hell out of their obscene profits,then jail ‘em.
I think it’s an oil price scam. If they lower oil & or gas prices, No more lining the CEO’s pockets. There’s no way lowering oil prices will hurt anything. Just the big wigs is all. IT”S HURTING US !!
Anyone actually look at the big picture of what these gas prices are actually costing us? The federal minimum wage is $7.25 per hour. And we’ll round up here, gas is (almost) $5.00 per gallon. Most people work 8 hours a day. Most gas tanks are anywhere from 12 -25 gallons. Some are more. We’ll stick to 15 gallons for our math for now. So, if you think, $7.25 x’s 8 = $58 per day of work (before taxes). And on the gas side, $5 x’s 15 = $75 per tank if you fill up a full tank. If you don’t wait to fill up your tank, you’re still spending $30-$35 each time you go to the gas station, which could be up to 4 times a week or more. If you already understand what that impacts, that’s more than half of one day’s worth of work if you’re making minimum wage. I understand that plenty of people make more than $7.25 an hour, but those minimum wage workers provide all the rest of the people with those things such as our gas, and fast food, grocery stores, and entertainment, among other things. If these people can’t afford the gas, then everyone else suffers. It’s the people on the bottom that support the top. Think of a pyramid. I hope you get my point by now. Something has to be done. Yes, we need to be more efficient with our gas usage. However, those of us who went through the drastic increase in price in 2008 already learned that lesson. I had to leave my job as an insurance agent, which required a considerable amount of driving, due to the gas prices. I lost business so I lost money and could no longer afford to keep my job. I learned about fuel efficiency then and have not changed my habits. What do I, and others in the same boat, do now? Except yell at the top of our lungs (metophorically speaking), and hope someone at the top hears us? Maybe my voice added to the others will help make our cry for help a little bit louder.
Gas prices are driven by commodities traders. The CTFC is holding hearings right now about how to regulate these guys. That would be a great place to make your voice heard. Submit your comment here
http://www.cftc.gov/LawRegulation/PublicComments/HowtoSubmit/index.htm
Here’s more on the issue
http://useconomy.about.com/b/2011/04/15/commodities-regulation-needed-to-stop-inflation.htm
If they keep it up the overpaid welfare reciepients in Washington will find out what living on foodstamps and welfare is all about.The cost of living keeps going up and wages are not. People on fixed incomes cannot make ends meet as it is. Like I said before “how much education do you need to be stupid?” Washington needs to bust someones “bubble.” They know that the people NEED gas, so they feel that they can up the prices and it won’t make a difference except fatten their wallets. Who cares if ours are empty!
I m someone over-intelligent. I have the answear to this.
Gas prices it’s not the problem.
We drive a one tone and half car for moving our little body who weight 80 kilos.
Cars are a huge technology mistake.
I hope the gas prices will increase more and more so it could stop this nonsense.
Men women have luxury behaviours nowaday. Most of the time we don’t need cars.
The humans in the devellop countries must start to wear a thick wintercoat, gloves, and drive a scooter who use only 2 liter of gasoline for 100 kilometers!. That is largely enough for going to work. We don’t need so many cars. Gas Scooters for every one.
With a little roof that protect against the rain.
Look India, China, Italy and others countries do it every day.
So we wont have to extract so much oil.
So we will be able to make it with biofuels
I just want to say: Americans, rejoice at your extremely low gasprices…I live in The Netherlands, and as of now (october 2011), I am paying $8,46 for a gallon of gas…
You guys with the measely 4 bucks a gallon don’t know how lucky you are…
i think that maybe we should just stop depending on other contries we should try to be independent. using only our natural resources…..
or maybe try to reduce oil and go electric
Strategic Petroleum Reserve needs to be tapped to keep prices below $3 a gallon but our lame governement won’t do that…Too much profit and kickbacks involved..
Its used to has a political scam to get re-elected…high gas prices..offer to lower them if re-elected….
Maybe the American people needs to call the so called White House and flood their lines with calls to lower gas prices and fix this economy that they keep messing up..
AMERICAN PEOPLE ARE TIRED OF BEING TAXED, USED FOR POLITICAL GAIN…..OCCUPY WHITE HOUSE NEEDS TO BE IN ORDER.!!!
Why would any wealthy congressman or woman care about helping the Gray area, they are all still mad about paying the highest tax rate for the fiscal 2011 yr. Its payback time, and there all inside making the $$$$$$$ and not you all, get it. I do.
Here’s how it really works. Its all speculation really, here goes the story : I need 10M more this year because I was taxed 5M more than usual, so I will call all of my other Uber-Rich buddies and talk all of them into raising a market. Since were rich and money are our only tools, we work both ends, and raise up the market till its about to pop and short the stock and make triple on the crash.
If you want to find out who made the fat cash watch the main traders shorting the stock right at the sub peak , and you will have your answer.
As for the nether-lands quote. We make 28% of the worlds fuel, we shouldn’t have to pay 40% more for it. I know you and the rest of that side of the world import everything, (except for fish and soccer players and chocolate) keep doing that, while we keep making the black gold.
This board post is called US Economy so I will put this in terms you will understand, Just go away. And please keep catching the fish…
OIL! Price goes up (why? – no one seems to know for sure).
As price of oil/gas goes up, more of our income is diverted to filling our tanks, Costs of EVERYTHING goes up as a result of high gas prices.
In our current economic situation high gas prices spell disaster and hopelessness for the vast majority of US citizens. Yet we, like cattle, are prodded along into our pens of economic hardship with no one “out there” to do anything about it. I have never felt so impotent and helpless as I do lately. Is there no one in our government that has the balls to fix our miseries?? To stand up and say “ENOUGH ALREADY!!!!” How long must we continue to suffer the slings and arrows of do-nothings and that pull the strings?
Hi Allan,
The government is taking steps to regulate commodities traders. The Dodd-Frank Wall Street Reform Act attempts to do just that.
Kimberly
One of our past presidents stated that we are addicted to oil in this country. I believe that it would be more accurate to state that we are being held hostage by oil. We have not yet seen an affordable option that can replace gasoline. Gas and oil prices have been and will continue to be the main drag on this economy unless we can find a viable alternative. By far most american familys cannot afford the cost of hybrids and electric vehicles. The cost of paying for oil products to fuel our vehicles, heat our homes, and pay for electric energy has now turned into a large monthly bill which most of us cannot afford. It leaves us with a lot less money to spend which in turn is a real drag on the economy. What is sad is that no one in this great nation of ours seems to be able to come up with an answer for this crisis or perhaps there are powerful people heavily invested in oil that are not at all intrested in our independence on oil.
First you state in the article that “However, the high oil prices of today are not caused by a decrease in supply. In fact, oil imports have remained at a fairly steady 13 million barrels per day for the last four years.”
Then you go on to say “The Federal government has access to the Strategic Petroleum Reserves. It can release extra oil, if needed, to keep gas prices from skyrocketing”, so which is it? Your argument isn’t sound.
Karim,
I see your point. And, at the same time, it seems to work. So much of the economy is driven by confidence, or lack thereof.
Even though supply is more stable than prices, sometimes what happens is that the investors are afraid that the supply will drop. They drive the prices up. And, even though supply hasn’t changed that much, releasing oil from the Strategic Petroleum Reserves allays the fear enough that prices drop.
Kimberly
When gas prices go over $5.00 be ready for WWIII. Have you ever seen the movie The Road Warrior?
the u.s. exports 600,000 barrels of oil a day,but we are still importing at the same time.[something smells]1or2 [not sure of the count] refineries are closed down because of low demand in the u.s..the u.s. is exporting gas and diesel,ready for use.what can the pres. or congress do about it ,nothing,this is a capitalist country.it is corporate greed at it’s best