Seven Dollar Gasoline by July

The price of oil has gone up — a lot.

In 1973, before the Yom Kippur War, gas in the United States was selling for 30 cents a gallon, and a barrel of crude oil was around US$7 to US$8.

The price per barrel climbed to US$15 in the 1980s, but then something strange happened and it shot up to $147 about five years ago, helping to cause the global recession.

After a stock market wipeout reset the price briefly to a low of $33, it has bounced back.

Now it seems stuck at $99 a barrel.

What the heck is going on?

Part of the reason has to do with inflation; part of it has to do with the falling dollar.

Most of the explanation has to do with dwindling supplies and a constant and expanding demand from emerging markets like China, Brazil, and India.

Despite the global downturn, Indian car sales were up by 8.5% in December; Brazil car sales were up 4.6%; the forecast for China is 10% growth in car sales for 2012.

And despite what you hear about shale oil and new finds off the coasts of Brazil and Africa, new finds aren’t keeping up with demand.

As the economy expands, the cost of fuel will go up.

Tricky Rick

Today, Rick Santorum is being lambasted in the press for saying the high price of gasoline has caused a recession.

There are plenty of reasons to make fun of Rick Santorum — or any politician, for that matter — but there is something to the idea that high gasoline prices cause recessions.

As you can see by the chart, the blue line is gas prices, the gray stripe is recessions, and green is housing:

It looks like high gas prices precede recessions.

Anyone who lived through the oil embargo in the 1970s could tell you that.

When costs go up, people and businesses have to cut back somewhere else (the opposite is also true), and this leads to a negative spin cycle.

Coming Soon: Seven Dollar Gasoline

Over the past four weeks, gas prices have gone up 19 cents a gallon.

Regular unleaded gasoline now averages $3.48 a gallon, compared to $3.12 a year ago and $2.67 in February 2010.

Given the historical rise in gas prices in the spring, we could add another 70 cents by May. That would put gas at $4.20 before we get into the summer driving season.

Prices go up every spring because refineries shut down to switch from winter to summer formulas.

And you can’t blame high prices on more driving or a cold winter. The Energy Department reports we are consuming less fuel than we did in 2001.

The problem is that oil prices are at $99 a barrel… and trending up.

In July, global sanctions against Iranian oil exports will go into effect.

Right now, Iran exports 2.5 million barrels a day. Remember, oil is fungible — which means it costs about the same everywhere in the world for the same quality.

A loss in Iranian supply to China or India means those countries will buy it from somewhere else.

It is estimated that higher gas prices pulled $100 billion out of the economy last year.

A spike to $4.20 is coming without any foreign cut in supply. A jump to $6 on the back of sanctions is a real possibility; $7 is not out of the question.

It wasn’t that long ago that people thought I was a nutcase for saying oil was going to $100 a barrel…

A Market Solution

The politicians in the United States would like to shape U.S. energy policy, but they won’t get a chance.

The market has already made the choice, and the only solution to the looming energy crisis is the 500-year supply of natural gas around the globe.

The change over from oil to natural gas is coming. It is an unstoppable force.

There will be a new industrial revolution in those countries that adopt this energy early, as the largest cost input will move from labor to energy.

Investors who get on top of this trend will do very well.

Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.