Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
The media is having a field day with all of the unrest in Northern Africa and the Middle East. First Tunisia and Egypt, and now unrest has spread to Algeria, Jordan and Libya – home of professional wrestler look-alike Muammar Gaddafi. Didn’t we get rid of that guy in the 80s? Well, the result of all this unrest and what’s affecting you… is the shut down of oil flow from that country, which produces about 3% of the world’s crude.
Less oil coming out of the ground means less supply, which means higher prices. Some analysts are saying oil could hit $220 per barrel – up from $85 earlier this month.
With oil at $85 a barrel you can expect to pay around $3 per gallon at the pump. (I’m not talking about premium here because I never use premium.)
If you can remember the summer of 2008 when gas prices were over $4 per gallon, a barrel of oil was trading hands at around $130/barrel.
$85/barrel of oil = about $3 per gallon of gas
$130/barrel of oil = about $4 per gallon of gas
$220/ per barrel of oil = $7-$8 per gallon of gas (or way more than anyone can afford!)
At what point do you just ride a horse? Will you have to scratch your summer driving trip to Wally World? I don’t think you have to worry about $7 gas just yet and here’s why.
1. OPEC (The Organization of Petroleum Exporting Countries) wants to keep oil around $75 to $85 a barrel. Why? Because when gas prices start hitting $4 a gallon, people stop driving. Just under $100 a barrel is a nice “Goldilocks” price for the sheiks – not to high, not too low.
2. Speculation about oil breaking $200 is based largely on concern about the current unrest spreading to Saudi Arabia, the mother of all oil producers. But the Saudi King is already doling out money to the Saudi people as an insurance policy against political and social unrest. He just announced a $37 billion unemployment and stimulus package designed to keep “the people at bay.”
Another tip: Oil prices will likely continue to rise over time. What’s your best hedge against it? Owning oil stocks and companies that profit from higher oil prices. That way even if you are getting squeezed at the pump, at least your retirement portfolio will be going up. Take a look at State Street’s Energy ETF that holds many of the world’s largest oil companies (XLE).
How high does gas have to go to before you stop driving?
—By Wes Moss, for the Bargain Hunter
(Use our interactive map to find metro Atlanta’s cheapest gas prices.)