There is not much that 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. The amount of crude oil that can be pumped daily out of the giant Cantarell oil field in Mexico is declining rapidly. After peaking at 3.82 million barrels per day in 2004, Mexico’s total daily production is falling by as much as 8% per year. North Sea oil output peaked in 1999 at 2.91 million barrels per day. Daily production has since fallen to 1.81 million barrels per day. Similar reductions in daily output have occurred in the United States, Russia, Iran, Argentina, Peru, Columbia, Australia, Turkey, Libya, Egypt, South Africa, Spain, France, Algeria, Pakistan, Yemen, and a host of other countries.

However, not all countries have reached peak. 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 getting close to peak. 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 constant, demand continues to grow at a steady pace.

For decades, giant US corporations have been moving their manufacturing plants to foreign countries to take advantage of lower wage costs. Since the source of any country’s wealth is it’s natural resources and manufacturing ability, all those countries which have created manufacturing plants are now becoming wealthy. Citizens of those countries are moving from poverty to middle class. In the last 2 years alone Brazil has lifted 20 million citizens from poverty to middle class. China and India have done ten times that amount.

All these new middle class consumers want the 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 require energy.

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

The international value of the dollar has been declining for the past few years. The decline is accelerating due to the subprime mortgage crisis. While this is a topic that requires an entire article to itself, the short version is that the Federal Reserve is diluting the value of the US dollar by creating billions of dollars out of thin air in order to bail out the giant Wall Street firms which have created a financial quagmire.
While the subprime mortgage crisis is very serious, it pales in size compared to the real crisis, which is a result of artificial valuations of structured financial packages that include trillions of dollars of derivatives.

The worlds financial system is freezing up and crumbling as a result. The Federal Reserve has already stated in the recent Bear Stearns case that these firms are too big to fail and will be “rescued”. They are too big to fail because of the derivative contracts that they have issued. If one of these giant firms fails, all of their derivative contracts also fail. That would create a domino effect throughout the world, and the world’s financial system would instantly seize up. This is no small matter.

The Federal Reserve has no choice but to continue to bail out these firms. And the method of “rescue” is to create money 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 currency is created out of nothing and injected into an economy, it takes a while for the dilution process to occur. The lag time is typically 5 to 8 months. Therefore, the money 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.

More bailouts are coming, but I cannot accurately predict the size and speed of those bailouts at this time. Therefore I do not know how high gasoline and energy prices will go. It is a matter of constant monitoring in order to view the current rate of dilution of the currency, and forecasting the results 6 to 9 months into the future.

Based upon what is happening right now, $6.00 gasoline in the US in 2009 is better than an even bet.

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1. Do you know, Why Are Gas Prices So High?

In recent times the price of gas hovered around $3.20-$3.30 a gallon. Then, we used to be able to argue that this price was not an all-time high when based on the price adjusted for inflation. It is true in parts of this 50’s, 60’s and ’70s gasoline prices were higher than $3.00 a gallon if we adjusted the dollars for inflation.

It’s at an all-time high

However, at $3.80 a gallon we’ve broken through this threshold. Now of course, the gasoline we buy at the pump today is a much more expensive blend than what we bought at the pump in the ’50’s, 60’s, and 70’s. This is because the gasoline we buy today has to meet much stricter environmental standards and this pushes the price up.

Still, the price of gas is high when compared to just a few years ago and this begs the question, why? In this article, we will explain the reason we pay what we do for gasoline today. First, let’s start with what the reason is not.

Evil big oil

How do high gasoline prices help oil companies? There is no logic to the assumption they do. If there was only one oil company it would be different, however, there are a lot of oil companies. Each one competes against the others. If one company can sell for less, this company will. In doing so they will gain a larger part of the market and make more money. By raising prices, companies stand to price themselves out of the market. This is senseless!

On top of that, with prices so high, alternative fuels become more viable and relatively affordable. Is this what gas companies want? Are they looking to put themselves out of business? Blaming oil companies is an easy and convenient answer to our problem, but it is not logical.

Economics 101: Supply and demand

Any capitalistic economy depends upon the law of supply and demand to set prices. Prices are based on how much of a commodity exists and how much demand there is for this commodity. In recent years, China and India have become huge buyers of oil. Since the supply of oil has not increased, the price of course, has increased. If the people of China were still using rickshaws as their mode of transportation, perhaps we wouldn’t be having this problem.

Normally, when a commodity has increasing demand, suppliers will make more of this commodity in order to gain a larger share of the market. In America, oil companies are not allowed to do this. There have been no new refineries built in the United States since 1967, and American oil companies are not allowed to drill in the Gulf of Mexico like Mexican companies are.

For the last several years some folks, George W. Bush being one, have called for the drilling for oil in the ANWAR region of Alaska. Certainly, if we were drilling for oil there, the oil supply would be increasing.

A republican led bill calling for drilling in ANWAR was proposed in 1994 and President Clinton vetoed it. Some say there is a veritable Saudi Arabia in this region, if this is true, and this bill was not vetoed, it stands to reason we would be more than meeting the supply of our oil consumption by now. So, this price pinch would not be occurring.

Market volatility

Added to the two problems of the growing need for oil and the supply which environmentalists prohibit us from using, is the problem of market volatility. In capitalism, prices of commodity swing wildly upward and downward. A case in point would be the recent real estate boom. During 2005-2006, prices of real estate became very high; to a lot of people, the prices were actually untouchable. It was at this time, the pundits started to ask, when will the real estate bubble burst?

They asked this question because it was obvious the price of real estate could not keep going up forever. There had to be a point at which no one would be able to afford real estate if it kept shooting upward. The pundits were right. The bubble did burst and the price of real estate has come tumbling down.

We can also look back to the tech stock boom of the 90’s. At one point the NASDAQ was trading over 5,000. At this time, many analysts were telling us to keep buying these stocks because the NASDAQ was going higher. However, there came a point when the NASDAQ was no longer a bargain and the price came tumbling down; all the way to 900. Obviously, the NASDAQ had been overbought and could not sustain trading at such high numbers.

Right now it’s impossible to look at what’s happening in the crude oil market and not see similarities between the real estate bubble of 2006-2005 and the NASDAQ boom of the late 90’s. It is very likely crude oil is now very much overbought and will come tumbling down as well.

However, for the time being were stuck with high oil prices and though there are politicians who want us to never become oil independent, there are many of us who believe we will always be under pressure from high oil prices if we don’t start drilling our own.

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2. Mortgage Interest Rate History, and a Change for the Future
3. Are you Fed up with Your High Insurance Premiums?