Everyday Blog

As of the timeof this writing, the national average gas was below $1.00 the forecast was made by this author it would climb in price to $3.00 per gallon. Here we are with gasoline priced well over $3.00 per gallon, and I am now convinced that the cost of gasoline will reach $6.00 per gallon in the United States in 2009.

Not much can be done to stop that from happening. To understand why, we need to examine the factors that are the causes of the price rise. There are three: demand, supply, and the value of the currency.

Supply is near or at 100% of capacity. There is only so available. In recent years reductions in daily output have occurred in the United States, Mexico, Russia, Iran, Argentina, Peru, Columbia, Turkey, Australia, Libya, Egypt, South Africa, Spain, Algeria, France, Yeman, Pakistan, and a host of other countries.

However, not every country has reached peak. Some experts claim that Saudi Arabia will not reach peak production for a few more years, while others claim Saudi Arabia is at peak already. Regardless of which analyst is correct, Saudi Arabia is getting close to peak. Brazil, Venezuela, and Iraq have yet to reach peak oil output. However, the amount of spare capacity in those countries yet to reach peak oil production does not exceed the declines experienced in countries experiencing declining oil production.

While supply remains constant, demand continues to rise at an alarming pace.
In the last 2 years alone, Brazil has lifted 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 want the lifestyle enhancements common to the middle class: more meat in their diets, improved homes, and a means of personal transportation for more distant and frequent travel. This requires 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 world’s financial system is freezing up and crumbling as a result of the subprime mortgage crisis mixed in with derivatives abuse by Wall Street. The Federal Reserve has already stated in the recent Bear Stearns case that these corporations are too big to go under and will be “saved”. They are too big to collapse because of the derivative contracts that they have created. If one of these giant firms goes under, all of their derivative contracts also fail. That would cause a domino effect throughout the world, and the world’s financial structue would instantly seize up.

The Federal Reserve has no alternative but to continue to bail out investment banks. And the system of “rescue” is to produce currency out of nothing and loan it into existence to these corporations. In the past several months alone, over a quarter of a trillion dollars have been produced in bailout money in the United States. This will resume. The result is a constant diluting of the value of the dollar.

When money is produced out of nothing and injected into an economy, it takes a while for the dilution process to occur. The lag time is usually 5 to 8 months. Therefore, the currency that has already been produced in the spring of this year will promote 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 cheap auto insurance if you cannot afford to buy the gasoline to drive your automobile?