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This is all conjecture, understand? But we were talking over lunch about the continuing increase in the price of gasoline. That subject has everybody talking, right? Well, crude oil has just gone comfortably over $120 per barrel and we are well on our way to a national average price of $4 per gallon for regular unleaded gasoline. What is doing this? And where is it going?

Remember when gas was this cheap? May, 2006.
Weak Dollar
Since George W. Bush entered the White House, the value of the dollar has fallen 41%. This automatically makes the price of gasoline in dollar terms much, much higher. At dollar parity from the beginning of 2001, we would be paying $72 dollars for a barrel of oil and gasoline would be priced at between $2.25 and $2.50 using the equation from energytomorrow.org. EnergyTomorrow.org is brought to you by “The people of America’s Oil and Natural Gas Industry”. Their formula contends that crude oil is 72% of the cost of gasoline; refining, distribution, service stations, marketing is 16% (probably includes their profits as well); taxes are another 12%.
So, with gasoline being at a national average of $3.61 today, the weak dollar accounts for $1.36 of the cost per gallon.
Now, government policies determine the value of the dollar and even though President Bush and the Treasury state that they are in favor of a strong dollar, their actions have resulted in a weak dollar.
Crude Oil Prices
Sure, crude oil has just moved over $120 per barrel. Goldman Sachs Group was widely criticized in 2005 when they forecast a barrel of oil at $105. Now, they are talking about $150 per barrell by the end of the year. $150 would result in gasoline priced in the range of $4.90 to $5.10 per gallon. If the price per barrel rises to $200 per barrel a per gallon gasoline price of between $6.40 and $6.60 per gallon would be the result.
Big Oil?
We believe, although we have no proof, that Big Oil is also a major culprit. They do have some level of influence on the price of crude oil. After all, they drill for it, pump it, refine it and sell it. For the past half decade, it has appeared to us that Big Oil has been playing a psychological game with American drivers. They ratchet up the price of gasoline to $3.00 per gallon and everybody is pissed. Then they drop it back to $2.50 per gallon and everybody feels better. The next price peak is $3.25 and then it drops back to $2.75. The next price peak is $3.50 and then drops back to $3.00. See the pattern? Intentionally or not, they are psychologically conditioning us to higher and higher prices.

Long Term Impact of Really Expensive Oil – the Auto Industry
If regular unleaded gasoline goes to $5.00 – $6.50 per gallon, what might happen? Lots!
• New vehicle sales will be hit hard. Maybe a 14 million unit year or lower.
• CAFE legislation won’t be such a problem – the market will take care of that right away.
• Fuel economy will rise dramatically due to higher levels of fuel saving technology in cars.
• Fuel economy will rise substantially due to a shift from larger to somewhat smaller vehicles.
• There will be a market for really good (but more costly) small cars – like in Europe.
• Gas hybrid sales will boom. Plug-in hybrid alternative will make more sense. Maybe Americans will seriously consider diesels instead of gas (depends on diesel/gasoline price premium).
• There could finally be some headway in earnestly creating a non-petroleum based alternative fuel infrastructure (ie hydrogen), though this will likely take decades to create.
• Auto industry profitability will drop drastically due to lower volumes and higher sales of less profitable vehicles.
• The profit impact of a lower auto industry plus the huge mix shift will destroy at least one of the Big Three Detroit auto companies. The UAW will lose what little leverage it has left.
• The RV industry will come to a halt.
• 1/2 ton pickup buyers (largely personal-use buyers) will consider compact/mid-size pickups
• 3/4 and 1 ton pickup buyers (largely commercial-use buyers) will defer their replacement purchases as long as possible
• New Class 8 truck sales will stop, but reconditioned/re-powered used Class 8 truck sales will boom.
Long Term Impact of Really Expensive Oil – Your Living Situation
• Telecommuting will increase… you wanted to stay at home anyway
• Homes located near places of employment will maintain or increase in value.
• Homes far away from work centers will lose value and languish on the market
• Drivers will bitch and moan. Might even drive slower!
• Over the road truck drivers will strike – till they get a higher income structure
• The cost of food will go up world-wide. The wealthy USA will buy its way out of the problem; poor people in poorer countries will suffer badly.
• Senators and congressmen will hold many hearings, but in the end, will discover that fuel price is a function of supply and demand + gas tax.
Long Term Impact of Really Expensive Oil – The Energy Industry
• There will be more oil drilling using secondary recovery techniques
• There will be more solar and wind power.
• When I finally replace the roof on my house I’ll seriously look at solar shingles.
• Some coal-to-liquid fuel projects will be revived again (but it takes 10 years+ for them to come on-line).
• And, finally, the really big issue may be what OPEC does with the windfall revenue they get from astronomical move upward in crude oil pricing. They are not known for using their profits for humanitarian purposes. We could see their overflowing coffers as ways for them to further de-stabilize the world’s economies.
Eventually the world will adjust to much higher liquid fuel prices. But the transition will not be pretty. And some say that the next shortage will be that of potable water. As water becomes a scarce resource, the world can’t act us though it is free. And that transition will be even more impactful.
Exciting times!