Cars Bikes and Autos

As of the timeof this writing, the national average cost was below $1.00 the prediction was made by this author it would climb in price to $3.00 per gallon. Now we have gasoline priced well over $3.00 per gallon, and I am now convinced that the price of gas will reach $6.00 per gallon in the United States in 2009.

Not much can be done to prevent that from happening. To understand why, we need to examine the factors that are the causes of the price rise. Basically there are three: demand, supply, and the value of the currency.

Supply is near or at 100% of capacity. There is only so much oil that can be pumped out of the ground. In recent years reductions in daily output have occurred in the United States, Mexico, Russia, Iran, Argentina, Peru, Columbia, Turkey, Australia, Libya, Egypt, South Africa, Spain, France, Algeria, Yeman, Pakistan, and several other countries.

However, not all countries have reached peak oil production. Some analysts believe that Saudi Arabia will not reach peak production for a few more years, while others believe Saudi Arabia is at peak now. Regardless of which analyst is correct, Saudi Arabia is getting close to peak oil production. Brazil, Venezuela, and Iraq have yet to reach peak oil output. However, the amount of spare capacity available in countries that have yet to reach peak oil production does not exceed the declines experienced in countries experiencing declining oil production.

While supply remains steady, demand continues to rise at an alarming rate.
In the last 2 years alone, Brazil has lifted 20 million citizens from poverty to middle class. China and India have done ten times more. All these new middle class consumers want the lifestyle enhancements common to the middle class: more meat in their diets, improved homes, and a means of personal transportation for more distant and frequent travel. This requires more energy.

If supply and demand figures were not enough to cause energy prices to rise substantially, there is another factor as well: the value of the US dollar.

The world’s financial system is ceasing to function properly as a result of the subprime mortgage crisis mixed in with derivatives abuse by Wall Street. The Federal Reserve has already stated in the recent Bear Stearns situation that these firms are too huge to go under and will be “saved”. They are too large to collapse because of the derivative packages that they have issued. If one of these giant firms goes under, all of their derivative contracts also fail. That would cause a domino effect across the world, and the world’s financial system would instantly seize up.

The Federal Reserve has no choice but to continue to bail out investment banks. And the system of “rescue” is to produce currency out of nothing and loan it into existence to these firms. In the past several months alone, over a quarter of a trillion dollars have been created in bailout money in the United States. This will resume. The result is a constant diluting of the value of the dollar.

When currency is created out of nothing and injected into an economy, it takes a while for the watered down process to occur. The lag time is usually 5 to 8 months. Therefore, the currency that has already been created in the spring of this year will cause the negative effects to be felt in the fall and winter of this year.

Based upon what is unfolding right now, $6.00 gasoline in the US in 2009 is better than an even bet. What good is cheap auto insurance if you cannot afford to buy the fuel to drive your car?