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Check Your Gas Gauge...

If you're surprised by the price at the pump, you're not alone. Many experts are too, but say you should expect more energy price surprises ahead. Gasoline prices have soared, and when you adjust past prices for inflation, the $3.00 per gallon matched the previous record high set way back in 1918.

Is Relief on the Way?

Experts say probably some, but not much. The changes in day to day gasoline prices are closely tied to changes in crude oil prices, which also hit record highs. Oil prices reached new highs because of continuing strong demand combined with low inventories and supply disruptions. World demand has also increased rapidly as American consumers use more and Chinese consumption rose 15% in 2004 and is expected to be even higher for 2005. Experts say not to expect relief soon, as the oil that is being purchased on the market now is for January and February.

Supply disruptions due to the hurricanes have also pushed prices higher. 33% of crude oil used in the U.S. come from the gulf refineries. Other short term disruptions from our other suppliers, including Ecuador, Iraq, Nigeria and Norway, have also fueled the increase. Only 9% of the oil used in the U.S. comes from Saudi Arabia.

As long as strong demand and supply disruptions continue, experts believe oil prices will remain high, although probably below $90 per barrel. This will also mean higher heating bills for all, including electric users. The only way that prices will drop is for demand to drop sharply while inventories rise faster than expected.

How Does This Effect the Economy?

Historically, when oil prices have spiked, we've seen two responses: inflation and recession. Oil prices have been rising for almost three years, which has given the economy time to adjust. During this time, the U.S. Economy has powered on, growing above 3% annually and inflation has remained tame. Consumer prices have risen by just 2.3% per year during the same period.

Despite complaining loudly about prices at the pump, Americans haven't cut back their driving habits. Part of the reason is that energy totals less than 6% of consumer spending and gasoline accounts for only about half of all energy spending. Although energy spending has increased 58%, or $182 billion, since 2001, overall consumer spending has risen 21%, or $1.5 trillion- more than eight times as much.

Will We See Higher Inflation?

High oil prices haven't rippled through the rest of the economy as much as expected. Many companies report that they haven't raised prices but are offsetting higher energy prices with other cost reductions. This will work for the short term but businesses cannot continue to absorb these expenses for long. Higher energy costs will impact everyone's way of life, from the fuel for your vehicle to the food you buy, everything has to be moved from one point to the other. Until demand is reduced and oil inventories are higher, prices will remain high. Fuel prices under $3 per gallon may never be seen again.

American's are going to have to adjust their driving habits, we still have the cheapest fuel costs in the world. If you have ever traveled out of the country you have seen this, just to the north in Canada, diesel fuel has been selling for $2.60 per liter, that is $11.00 per gallon. In London this past August, gas was $1.65 per liter, that is $6.98 per gallon. With that in mind, $3.00 per gallon doesn't seem bad. Maybe we should count our blessings.