AP reports that Goldman Sachs Group (NYSE: GS) predicts that the price of a barrel of oil could climb from its current $120 to as high as $200. That's not too much of a stretch because since January 2001, that price has risen 400% from $24. A rise to $200 would be a mere 67% increase from the current price. Meanwhile gasoline is likely to hit $4 a gallon this summer -- and if oil hit $200 a barrel, that could drive the price to $6.67 a gallon -- up 319% from the $1.59 it cost back in January 2001.
Why is the price of oil going up so much? Experts don't seem to know and I'm not an expert. But it looks like simple supply and demand does not explain such a rapid price rise. Some cite rising energy demand -- from China and India -- combined with a reduction in supply -- e.g., production declines in Mexico, an unstable oil industry in Venezuela and possible shrinking production capacity in the Middle East -- as a partial explanation.
But then there are the other factors that seem hard to measure -- the potential decline in the dollar, political instability (such as the U.S. firing warning shots at two Iranian boats in the Persian Gulf this week), and so-called speculators. Of all these factors, the speculators explanation is the most interesting. These could be hedge funds and commodities traders who borrow huge amounts of money to bid up oil prices.
Michael Lynch, president of Strategic Energy & Economic Research Inc. in Cambridge, MA expects prices to fall as low as $80 in 2008 and perhaps as low as $50 by 2012 as more global supply comes on line. I am inferring that he thinks that these speculators account for the gap between the current price and that justified by supply and demand.
Some rough calculations suggest that these rising gasoline prices are going to squeeze the average American family even more. If gasoline hits $6.67 a gallon in the next year or so, that would mean $133.40 to fill up a 20-gallon tank. For a commuter who fills up the tank twice a week, that would be $266.80 a week -- which is 320% more than the $63.60 that commuters paid back in January 2001.
The result of this increase will put the screws to the typical American family's monthly budget. The median family took in about $45,560 after tax in 2007 (assuming a 28% tax rate on median income of $60,500) -- or $838 a week (dividing that by 52). Since median income is about the same now as it was in 2000, that means that a twice a week fill up was 7.6% of weekly income in 2000 and is 31.8% now.
I am not sure how much the median family pays for food and utilities each week but I think $6.67 a gallon gasoline will force those families to stop buying other things. Such discretionary items might include going out to restaurants, taking vacations, and buying new clothes. How are you coping with the rising price of gasoline? What will it take to bring the price down?
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Goldman Sachs securities.











Reader Comments (Page 1 of 1)
4-26-2008 @ 9:44AM
Bellcord said...
How am I coping ? At 63 I now drive a Honda scooter like Third World Asia circa 1953. This not only gets 70 mpg but any day now someone still circulating in a 7000 lbs. Hummer,Huffer,Hooter or Suburbasarous will run over my dog-ass effectively reducing my carbon footprint to "0"..T. Boone says oil falls to$85 next Q.
4-26-2008 @ 11:03AM
B. Harrison said...
It is obvius that this is both an economic and political move by the Arabs.
4-26-2008 @ 11:30AM
B. Harrison said...
So, isn't the Bush family supposed to be "good friends" with the Saudi Arabians? Looks like George Bush certainly doesn't have any current "influence" with the Saudis or any of the other Arabs.
They've discovered that with the developing demand from China and the other third world countries, they obviously don't need the USA as they did in the past; and now they have decided to pick our bones economically; and that works to their political advantage also.
Bush has expended any "political currency" that he might have had. Now the question is what petroleum interests does the Bush family hold, and how much wealth are THEY gaining in the petroleum industry during George Bush's presidency?
What will be revealled once George Bush has left office? I've heard predictions that the American people will be astounded at the revelations that may be made.
4-26-2008 @ 11:42AM
B. Harrison said...
According to some claims there are reportedly abundant oil deposits . . . more than adequate to meet our needs . . . in:
-- the Gull Island fields in Alaska
-- the Gulf of Mexico
However the U.S. government has done NOTHING to have those oil fields developed. Conseration is fine; but not at the cost of our national economy.
The question is: "If these oil deposits have been known to exist for MANY years, then why hasn't the government pushed for the development of these fields. The only thing that is going to bring down the price of foreign oil will be if the U.S. can produce their own oil from these reserves.
Could it be that "petroleum specital interests" do not want these oil fields developed? Is the Bush family have participation in, or connections to these special interests groups?
If the petroleum IS available in these fields, then why haven't they been tapped? Does our nation become impoverished because "someone" doesn't want the impact of the U.S. having a competitive production of oil? What is going on with all of this? Why hasn't Congress acted on any of this? Does the petroleum industry special interest groups have that much influence over Congress. These questions need to be answered!
4-26-2008 @ 2:21PM
hatertjay said...
Ill start stealing my gas from arab owned gas stations in america thats what ill do
4-26-2008 @ 3:29PM
Steve said...
If oil hits that high maybe we will reduce our spending on cheap chineese junk therefore putting their factories out of business and reducing the demand for oil from developing nations like China, We are now seeing the effects of moving all of our manufacturing overseas with a weak economy and high prices at the pump.
4-26-2008 @ 3:59PM
CJ said...
With gas prices like that, maybe telecommuting will finally become commonplace :)
4-26-2008 @ 6:50PM
william lindblad said...
I have a lot comment on these boards and it is all bearish but 6.67? Even I, fire belching and doomsday preaching would not go that far. My reasoning is simple. At about 4.50 (nat. avg.) it will strangle the entire U.S. economy. The oil princes know this. Our government knows this. Both parties remember 1972 and the consequences. If push comes to shove, the electric car, the one that you plug into you house at night, will become the main stay vehicle. We have nucelar, natural gas, coal and water power electric generation, especially at night when demand is low. We are the largest consumer of oil at the present point. Push the price too high and new technologies will emerge. We did not have rubber at the start of WWII. What happended? OPEC is well aware, the Arab culture is one of traders and they are very intelligent people who stay with their markets. The current situation is one of business only, unlike 1972.
4-26-2008 @ 7:02PM
Michael Schneider said...
By the time it gets to $200 if you believe Carlos Ghosn CEO of Nissan (see item in Trends section- left side at http://www.Barrelomoney.com) we will likely be moving to hybrid cars or maybe electric.
The time frame is critical though. I think there are still some problems to be worked out with hybrids before people switch but the higher the price of gas goes the more sense they make and if we have actual shortages of gasoline- which some think is a good possibility- I would think people will start going toward hybrids more and more.
4-27-2008 @ 1:59AM
Mike said...
Everyone needs to stop talking about it and take some action here,talking about it makes it worse than ever now!God forbid we take 10 minutes out of our lives to do something constructive to save this planet of ours before its gone and i am beggining to think that people just dont give a shit!.Something must be done or it will be an all out civil war here!Does your boss cover your gas expenses?No,if you make $10 an hour and spend $50 a week in gas for travel your really only making below the minimum wage!Disgusting.
5-01-2008 @ 3:17AM
Atarazoff said...
Gas is already over $7 a gallon in various other parts of the world. Two years ago I saw the price around 2000 won/liter in South Korea which is just about ($2/L)*3.8L/gal =$7/gal. Don't be too surprised if we get there. Hell, beer there could run up to $10 a bottle. Look forward to that if this years hops fail as much as this years did and we continue to through our nation's grain into our gas tanks in the form of Ethanol.