Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
Is gas really going to cost $5 per gallon this summer? The media seems to think so, offering up a steady stream of headlines like, “Experts predict gas prices to hit $5 a gallon” and “$5 a gallon? Analysts say it could happen.”
$5 gas would have serious ramifications not only for family budgets but also for economic recovery here in the U.S. But I don’t think it’s going to happen in 2012. Gas prices will almost certainly rise as they catch up with the recent upward drift of oil prices. But getting to $5 a gallon in Georgia would mean a 46 percent rise in prices from the current level. Based on recent history, that’s unlikely.
Between late 2006 and mid-2008, oil prices rose from around $50 per barrel to $145. Despite that 190 percent surge, gas prices during the same period rose just 86 percent — from $2.20 to about $4.10. Based on that, oil prices would have to rise from their current $100 to more than $145 and then stay there for more than a month before we see $5 gas.
Of course, if something goes terribly wrong in the Middle East, all bets are off.
Iran has threatened to close the Straits of Hormuz if the U.S. and European Union implement a financial embargo to force Iran to drop its nuclear weapons program. More than 17 million barrels of oil pass through those straits daily — 20 percent of the world supply. The West couldn’t allow a prolonged closure of that vital waterway and would be willing to take military action to re-open it.
Again, I don’t think that will happen.
The Iranian government funds half of its operating budget from oil sales, and losing that revenue would send Iran into a tailspin. Also, a spike in oil prices would be another blow to the struggling EU economy. The diplomats will certainly devise a way to avoid this potential mutual disaster.
Supply and demand will also kick in. History shows when gas climbs over the $4 mark, Americans change their behavior. They carpool, avoid driving vacations, and switch to more fuel-efficient cars. This phenomenon is called demand destruction. In addition, consumers who pay $4 for gas are forced to cut spending in other areas, which is bad for the economy. The economy then slows down, which leads to even lower demand for gas, which finally results in… lower prices for gasoline.
Could we see $5 in some cities this summer if things turn ugly in Iran? Sure. But I think it’s more likely that we’ll continue to hover in the $3.50 to $3.75 range.
What would you do if gas hit $5?
– By Wes Moss, for Atlanta Bargain Hunter