Oil closed yesterday at $123.93 a barrel, gas prices hit an average of $3.645, yet another pair of records. Here in the Cincy suburbs we’re looking at $3.75 and up this week, and I’m sure it higher for where many of you live. It’s safe to say it’s broken through the $120 support level, is heading for $125, and some say it could be $130 by Memorial Day weekend.
We’re already to the point where gas prices are beginning to lower demand and even change car purchasing habits. Sales of hybrids are up strongly, sales of SUVs are down significantly in 2008. Gas prices are beginning to change the US culture entirely.
Many of us think it’s going to much worse.
Americans are already paying through the nose for gasoline, and they think it’s only going to get worse.
A CNN/Opinion Research Corp. poll found that 94% of respondents expect they will have to pay $4 a gallon sometime this year – and 78% said they figure it will hit $5.
The national average for gasoline was $3.61 on Monday, according to motorist group AAA.
Consumers’ fears that they will have to pay more have intensified. A year ago, 79% thought gas would cost $4 by the end of 2007 and only 28% feared $5 gas.
At the same time, high prices seem to be easier to swallow now than it has been for most consumers in the past. Of the more than 1,000 American adults surveyed in the poll, conducted April 28-30, 60% said high fuel prices have caused hardship for them or their household. That’s down from 72% in March and 66% during the same time last year.
Five bucks a gallon certainly seems like a possibility this year, especially in California.
But how bad could gas get? That depends on oil.
A one dollar rise in oil prices is equal to about 5 cents a gallon at the pump. If oil continues to rise at the rate it’s going, roughly $5 a month, that’s a quarter a month added to gas. Here, it’s $3.75 a gallon. At $130 a barrel, $4 a gallon here seems like a certainly.
But what if oil keeps rocketing up? At $150 a barrel, you’d be looking at that $5 a gallon mark. And at $200 a barrel gas would be $7.50 a gallon.
Crude oil may rise to between $150 and $200 a barrel within two years as growth in supply fails to keep pace with increased demand from developing nations, Goldman Sachs Group Inc. analysts led by Arjun N. Murti said in a report.
New York-based Murti first wrote of a “super spike” in March 2005, when he said oil prices could range between $50 and $105 a barrel through 2009. The price of crude traded in New York averaged $56.71 in 2005, $66.23 in 2006 and $72.36 in 2007. Oil rose to an intraday record of $122.49 today on speculation demand will rise during the peak U.S. summer driving season.
“The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty,” the Goldman analysts wrote in the report dated May 5.
At those prices a tank of gas would be $100-$150. Demand for gas would drop precipitously, and with diesel fuel at those prices, demand for anything else delivered by truck would plummet as well as retailers would have no choice but to pass those prices to consumers.
Could you afford to drive to work if gas prices doubled from where they are right now?
100 gallons a month for a 2-car family is a lowball estimate, 6 tanks a month at 16 and some change a fillup, but it makes the math easier. $3.75 is $375 a month just for gas. At $7.50 a gallon at $200 a barrel, that’s $750 just for the car.
I’m fairly sure most American families can’t afford an extra $375 a month in gas prices, not to mention the raise in all other prices across the board due to fuel costs at the supermarket, the pharmacy, Wal-Mart, and so on.
In other words, oil at $200 a barrel wouldn’t just cripple the US economy, it would end it. If analysts are seriously talking about $200 a barrel oil, it would basically lead to something akin to an almost complete collapse of the engine of the economy, consumer spending.
Once Americans maxed out their credit cards on gas, that would be it. If THAT debt bubble explodes, and all indications are that consumer debt is exploding as more Americans rely on plastic to stay afloat, then it’s over.
U.S. consumer borrowing jumped more than double the amount economists forecast in March, indicating a slowing economy is forcing Americans to accumulate credit-card and other forms of debt.
Consumer credit increased by $15.3 billion for the month to $2.56 trillion, the biggest monthly rise since November, the Federal Reserve said today in Washington. In February, credit rose by $6.5 billion, previously reported as an increase of $5.2 billion. The Fed’s report doesn’t cover borrowing secured by real estate, such as home-equity loans.
Consumers are turning to credit cards after banks tightened standards for home-equity loans and other borrowing. The March figures brought U.S. consumer borrowing in the first quarter to $34 billion, the most since the first three months of 2001, when the economy entered its last official recession.
“Consumers are strapped as incomes are not keeping up with inflation and this is leading them to rely increasingly on credit to see them through the worst housing downturn since the Great Depression,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York. “The days of extracting cash from one’s home to spend on goods and services are long gone.”
Economists forecast an increase of $6 billion in consumer credit for March, according to the median of 34 estimates in a survey conducted by Bloomberg News.
By category, revolving debt such as credit cards rose $6.3 billion during March and non-revolving debt, including auto loans, increased $9 billion for the month, according to the Fed’s statistics.
Americans are just about tapped out. Oil at $200 a barrel would put things out of reach for millions of Americans. We’d see a whole new class of “underwater” consumers, those who actually lose money driving to work.
Putting in 60 gallons a month at a $15 an hour job for instance isn’t terrible at $3.75 a gallon ($225), but that turns into a second car payment at $7.50 a gallon, literally a week’s worth of pay just for the gasoline bill alone ($450, which would be the net on a 40 hour week with 25% tax rate).
Now imagine tens of millions of Americans fighting that kind of black hole. Yeah, we’d be paying what Europeans do for gas, but of course we don’t have the mass transit to make up for it. An hour commute is an a hour commute.
Americans can adjust to a point, but it’s going to basically wreck the economy as any discretionary cash goes to the gas tank. The result? That massive deflationary spiral I’ve been talking about as demand collapses across the board. Massive unemployment, shortages, possible riots, etc and so on, in other words, the Second Great Depression.
Will things actually get that bad? I’m not sure. It seems to me that even $150 a barrel oil and the resulting $5 gas that goes with it would go a long way towards knocking out any sort of timely recovery from the housing depression. At $200 a barrel it would pretty much stick a fork in most folks. At what point does the deflationary spiral kick in?
As strapped as most Americans are right now, that situation would come a lot sooner that most people think. It’s not going to take much to push folks over the edge at this point with all the other economic problems we’re having right now.
Will oil crash before the spiral breaks America’s back, or after? With many analysts saying that the US no longer drives oil demand but China and Europe do, if demand continues to support oil at that level, the crash may happen well after the consequences of $7 or $8 a barrel kick in and decapitate the US economy.
On the other hand, the cynical among us may smell an oil crash before Election Day here in order to make it less of an issue with voters, because right now the economy is by far the number one issue among voters of all stripes.
Still, it’s time to ask yourself if you can afford gas prices double what they are today. Do some math. If you’re going to be stuck with a car for 10 years, you’d better make sure you can afford gas in that car at $7.50 a gallon. Factor that in.
Odds are pretty good that gas will rise. I personally do see gas hitting $5 a gallon in the next 12 months and $150 a barrel oil. Even if you don’t buy Peak Oil theory, get used to gas at these prices. The most pessimistic oil traders are talking about a crash back to the $100 a barrel level as the lowest. The era of even $60 a barrel oil last year is dead and gone.
Now factor in an attack on Iran and what that would do to oil. Even in best case circumstances, $3-$4 a gallon is here to stay. It’s not going to go back down short of a massive collapse in oil worldwide. That may happen, but if it does, it would be because worldwide demand for oil would have plummeted and even then in America there’s only so low demand for fuel can go in our society.
I’m a Gen-Xer and I can recall gas at a buck a gallon back delivering pizza in ’98. I remember thinking $1.40 a gallon was an obscenity when Bush took office in 2001. Ten years later it’s $3.75 and looking to hit $4 before the end of the month and $5 before the end of the year.
Things are bad now, but survivable. At $5 a gallon things would be significantly worse, and at $7 or $8 a gallon, things would be catastrophically bad. As it stands even without an attack on Iran, oil might continue its run to those levels. Oil has already shot up $60 a barrel in a year, another rise like that would put it at $180 a barrel but next summer so that’s certainly not out of the question.
Long term, it’s time for us as Americans to significantly change the way we do things. It’s going to be hard and it is hard for many of us right now. I’m very sure it will only get worse, and should we actually attack Iran, all bets are off.
Run your own family’s numbers at gas being $7.50 a gallon, and kick your grocery bill up 25% and at a worst case scenario situation your home energy bill up 50% too. Finally, toss in a 20% bump in the rest of your bills as the dollar continues to drop.
See if you can still pay your bills in that environment. If you can’t, start figuring out now where the cuts are going to come. Do that now. Ask yourself “What would I have to cut out of my family’s spending?”
You’re probably doing some of that now. Run the worst case numbers anyway. See what you would really have to do to just get by.
I’m guessing you’re not going to get a 20% raise over the next year or two, and I’m guessing that those kid of expenses would pretty much destroy not only your discretionary spending but put you in a hole as well. If you’re already carrying a large chunk of debt, a worst case scenario like that would almost certainly break your back.
Now imagine the same thing happening to millions of Americans nationally.
$200 oil is game over, folks. If there are energy analysts talking seriously about $200 a barrel from the $124 we’re at now, we’re talking about systemic economic collapse.
It will not take much, folks. We’re looking at the abyss here, and the slope into the pit is covered in $200 a barrel crude.
Be prepared.
