Why Gasoline Could Hit $5 a Gallon This Summer
If you think you're paying a lot at the gas pump now, just wait until summer hits. Stronger summer demand could lead to record-high gas prices as an economic recovery takes hold and turmoil in the Middle East sends the price of oil higher.
If there are disruptions around the world, $5 isn't out of the realm of the possible during the summer driving season.
The Catch-22 of an Improving Economy
It's one of the strange double-binds of an economic recovery. As more people find work and confidence increases, investors bid up the price of oil, which in turn suppresses economic activity and consumer confidence. Since demand for gas changes very little because of price, the improvements we've seen in the economy just mean we'll be paying more at the pump.
We're not even close to full employment. Yet in the past year, gasoline prices have increased 10% to an average of $3.39 as of last week. That's not far from the high of $4.11 we saw in July 2008, before the recession fully took hold.
We may still be hurting here at home, but the U.S. is no longer the biggest driver of oil demand growth worldwide. A growing middle class in China, India, and Brazil has increased global demand. If our employment picture at home continues to improve and consumer confidence stays strong, those summer trips that have been canceled the last few years will be back on the table and the U.S. consumer will help push prices even higher.
Higher consumer demand also means more shipping of goods from overseas and diesel trucks driving these goods around the country. At this point, only another recession could stave off higher prices at the pump.
How International Tensions Play Out at the Pump
Perhaps the biggest thing impacting oil prices this year will be unrest in the oil-producing countries of the Middle East and elsewhere. Iran has threatened to cut off the 20% of the world's supply that travels through the Strait of Hormuz because of sanctions by the U.S. and the European Union against its nuclear program. Saudi Arabia has said it would pick up the slack in supply, but Iran has threatened Saudi Arabia should it does so. That leaves us at a standoff that could blow up in our faces at any moment and send the world into an energy panic.
Meanwhile, in the major oil producing nations of Syria and Venezuela, leaders have a tenuous hold on power. And there's even a chance Iraq is headed for civil war. If any of these countries have supply disruptions or, heaven forbid, go to war, we could easily see oil spike to record levels and gasoline's price jump as well.
Stoking Fuel Fires at Home
On the bright side, the U.S. has increased oil production more than any other country in the last three years, due in large part to increased drilling in North Dakota. And Canada is quickly increasing production that could be sent to the U.S.
This means that we're not only less dependent on foreign oil than we were in the past, we're also keeping most of the potential profits from a rise in oil's price closer to home. Continental Resources (CLR), Whiting Petroleum (WLL), and Statoil (STO) have nearly 2 million acres of land to drill in the Bakken shale play alone and are already drilling as fast as they can to increase domestic production even further.
If prices spike, you can be sure that offshore drilling will accelerate as well. The lull in production in the Gulf of Mexico after the Deepwater Horizon disaster is well past us, and it's back to business as usual for most drillers. Seadrill (SDRL), Transocean (RIG), and Noble (NE) are already building more ultra-deepwater capacity to fill the demand at new discoveries around the world.
Prepare for Sticker Shock
Still, there are just too many factors outstanding that could send oil higher, with gas following suit. An improved economy, a clash with Iran, or an angry leader on his way out of power could disrupt oil and send prices higher.
That makes $4-per-gallon gas seem almost inevitable, and $5 per gallon not as far out of reach as some might think. So plan ahead this summer. If you're on a budget, you might have to cut back on other expenses just to get where you're going.
Motley Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool and check out his personal stock holdings. The Motley Fool owns shares of Noble and Transocean. Motley Fool newsletter services have recommended buying shares of Statoil.