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April 9, 2008
Gas Prices probably to hit $4 a gallon by summer
Still in a speculative frenzy, oil prices continue to churn upward, heading for $109 bbl. Meanwhile, the cost of a gallon of gasoline is likely to hit $4 a gallon by Memorial Day in many parts of the country:
Gasoline prices could break the $4 barrier in some places this summer despite falling demand in the United States, the world's largest oil consumer, the government's energy forecasting agency said yesterday. One reason for the spike in gas prices is rising demand for oil from developing countries. But with US demand slowing as a result of the economy's downturn, the price should actually be falling. So why is it still rising?
Diesel prices already have soared past $4 a gallon, and prices for regular gas are verging on $4 in high-cost states like California. By Memorial Day, more regions will see spikes above $4, the Energy Information Administration (EIA) said, although the average price nationwide will probably peak around $3.60 in May or June.
The U.S. has rarely had to contend with record gas prices at a time when the economy is in recession. Demand for fuel already is falling at a 1 percent rate because of an economic contraction in the first half of the year, the agency said, and that will continue through the summer.
While the government forecaster foresees high fuel prices as a permanent fixture of the world economy, many private forecasters say they are befuddled by the relentless rise in prices which they think are defying the laws of economics, particularly with slumping demand in the U.S. Iran and Venezuela are seeing reduced output not due to any "political strife" per se as much as it is monumental mismanagement of the industry by the government. Nigeria, currently in the midst of a ruinous civil war sees frequent attacks on its major oiil pipelines thus significantly reducing its exports.
Many private forecasters attribute high prices to manipulation by the Organization of Petroleum Exporting Countries and speculation in the oil market, which reached record levels in the first quarter. Joe Stanislaw, an independent energy adviser to Deloitte & Touche, calculates that the physical realities of supply and demand point to an oil price of $50 a barrel.
The possibility of supply disruptions due to political strife in Iran, Venezuela and Nigeria might add another $10. Anything above that, he argues, is due to oil's popularity as an investment.
But the main problem is simple speculation and the fulfillment of wishful thinking; if you are a speculator and you believe the price of oil will continue to rise, you are likely to win that bet because so many are betting with you.
If the US economic downturn becomes serious, expect the speculators to cash out rather quickly thus causing the price of oil to plummet. It probably won't hit $50-$60 bbl say most analysts but anything below $90 bbl would be a most welcome boost to the economy