Gas pumpIf you think you're paying a lot at the gas pump now, just wait until summer hits. Stronger summer demand could lead to record-high gas prices as an economic recovery takes hold and turmoil in the Middle East sends the price of oil higher.

If there are disruptions around the world, $5 isn't out of the realm of the possible during the summer driving season.

The Catch-22 of an Improving Economy

It's one of the strange double-binds of an economic recovery. As more people find work and confidence increases, investors bid up the price of oil, which in turn suppresses economic activity and consumer confidence. Since demand for gas changes very little because of price, the improvements we've seen in the economy just mean we'll be paying more at the pump.

We're not even close to full employment. Yet in the past year, gasoline prices have increased 10% to an average of $3.39 as of last week. That's not far from the high of $4.11 we saw in July 2008, before the recession fully took hold.

We may still be hurting here at home, but the U.S. is no longer the biggest driver of oil demand growth worldwide. A growing middle class in China, India, and Brazil has increased global demand. If our employment picture at home continues to improve and consumer confidence stays strong, those summer trips that have been canceled the last few years will be back on the table and the U.S. consumer will help push prices even higher.

Higher consumer demand also means more shipping of goods from overseas and diesel trucks driving these goods around the country. At this point, only another recession could stave off higher prices at the pump.

How International Tensions Play Out at the Pump

Perhaps the biggest thing impacting oil prices this year will be unrest in the oil-producing countries of the Middle East and elsewhere. Iran has threatened to cut off the 20% of the world's supply that travels through the Strait of Hormuz because of sanctions by the U.S. and the European Union against its nuclear program. Saudi Arabia has said it would pick up the slack in supply, but Iran has threatened Saudi Arabia should it does so. That leaves us at a standoff that could blow up in our faces at any moment and send the world into an energy panic.

Meanwhile, in the major oil producing nations of Syria and Venezuela, leaders have a tenuous hold on power. And there's even a chance Iraq is headed for civil war. If any of these countries have supply disruptions or, heaven forbid, go to war, we could easily see oil spike to record levels and gasoline's price jump as well.

Stoking Fuel Fires at Home

On the bright side, the U.S. has increased oil production more than any other country in the last three years, due in large part to increased drilling in North Dakota. And Canada is quickly increasing production that could be sent to the U.S.

This means that we're not only less dependent on foreign oil than we were in the past, we're also keeping most of the potential profits from a rise in oil's price closer to home. Continental Resources (CLR), Whiting Petroleum (WLL), and Statoil (STO) have nearly 2 million acres of land to drill in the Bakken shale play alone and are already drilling as fast as they can to increase domestic production even further.

If prices spike, you can be sure that offshore drilling will accelerate as well. The lull in production in the Gulf of Mexico after the Deepwater Horizon disaster is well past us, and it's back to business as usual for most drillers. Seadrill (SDRL), Transocean (RIG), and Noble (NE) are already building more ultra-deepwater capacity to fill the demand at new discoveries around the world.

Prepare for Sticker Shock

Still, there are just too many factors outstanding that could send oil higher, with gas following suit. An improved economy, a clash with Iran, or an angry leader on his way out of power could disrupt oil and send prices higher.

That makes $4-per-gallon gas seem almost inevitable, and $5 per gallon not as far out of reach as some might think. So plan ahead this summer. If you're on a budget, you might have to cut back on other expenses just to get where you're going.

Motley Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool and check out his personal stock holdings. The Motley Fool owns shares of Noble and Transocean. Motley Fool newsletter services have recommended buying shares of Statoil.




Increase your money and finance knowledge from home

Economics 101

Intro to economics. But fun.

View Course »

Introduction to Retirement Funds

Target date funds help you maintain a long term portfolio.

View Course »

Add a Comment

*0 / 3000 Character Maximum

130 Comments

Filter by:
Austin

**** this I just quit working not going to work my ass odd just to pay for gas.

February 01 2012 at 12:32 AM Report abuse rate up rate down Reply
Mike

The Iraq war provides a good example. Until November 2000, no OPEC country had dared to violate the US dollar-pricing rule, and while the US dollar remained the strongest currency in the world there was also little reason to challenge the system. But in late 2000, France and a few other EU members convinced Saddam Hussein to defy the petrodollar process and sell Iraq's oil for food in euros, not dollars. In the time between then and the March 2003 American invasion of Iraq, several other nations hinted at their interest in non-US dollar oil trading, including Russia, Iran, Indonesia, and even Venezuela. In April 2002, Iranian OPEC representative Javad Yarjani was invited to Spain by the EU to deliver a detailed analysis of how OPEC might at some point sell its oil to the EU for euros, not dollars.

This movement, founded in Iraq, was starting to threaten the dominance of the US dollar as the global reserve currency and petro currency. In March 2003, the US invaded Iraq, ending the oil-for-food program and its euro payment program.
There are many other historic examples of the US stepping in to halt a movement away from the petrodollar system, often in covert ways. In February 2011 Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), called for a new world currency to challenge the dominance of the US dollar. Three months later a maid at the Sofitel New York Hotel alleged that Strauss-Kahn sexually assaulted her. Strauss-Kahn was forced out of his role at the IMF within weeks; he has since been cleared of any wrongdoing.

War and insidious interventions of this sort may be costly, but the costs of not protecting the petrodollar system would be far higher. If euros, yen, renminbi, rubles, or for that matter straight gold, were generally accepted for oil, the US dollar would quickly become irrelevant, rendering the currency almost worthless. As the rest of the world realizes that there are other options besides the US dollar for global transactions, the US is facing a very significant - and very messy - transition in the global oil machine.

January 29 2012 at 5:58 PM Report abuse rate up rate down Reply
Mike

The "petrodollar" system was a brilliant political and economic move. It forced the world's oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt. The petrodollar system spread beyond oil: the majority of international trade is done in US dollars. That means that from Russia to China, Brazil to South Korea, every country aims to maximize the US-dollar surplus garnered from its export trade to buy oil.

As oil usage increased in the 1980s, demand for the US dollar rose with it, lifting the US economy to new heights. But even without economic success at home the US dollar would have soared, because the petrodollar system created consistent international demand for US dollars, which in turn gained in value. A strong US dollar allowed Americans to buy imported goods at a massive discount - the petrodollar system essentially creating a subsidy for US consumers at the expense of the rest of the world. Here, finally, the US hit on a downside: The availability of cheap imports hit the US manufacturing industry hard, and the disappearance of manufacturing jobs remains one of the biggest challenges in resurrecting the US economy today.

There is another downside, a potential threat now lurking in the shadows. The value of the US dollar is determined in large part by the fact that oil is sold in US dollars. If that trade shifts to a different currency, countries around the world won't need all their US money. The resulting sell-off of US dollars would weaken the currency dramatically.
GOT GOLD?

January 27 2012 at 5:43 PM Report abuse rate up rate down Reply
Mike

WE WIL SOON LONG FOR THE DAYS OF ONLY 5 BUCKS.

January 27 2012 at 10:38 AM Report abuse rate up rate down Reply
Mike

Tehran Pushes to Ditch the US Dollar

India and Iran are negotiating deal to trade oil for gold. Does this matter, you ask? It strikes at both the value of the US dollar and today's high-tension standoff with Iran.

Officially the US & EU is Tehran must be punished for efforts to develop a nuclear weapon. Sanctions on Iran's oil exports meant to isolate Iran and depress the value of its currency to a point that the country crumbles.

Sanctions will not achieve their goals. Iran is far from isolated and its friends - like India - will stand by the oil-producing nation until the US backs down or acknowledges the real matter the American dollar as the global reserve currency.

In the 1970s a deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on oil trade with the US dollar as the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar's value up. Countries stored their excess US dollars savings in US Treasuries, giving the US government a vast pool of credit.

If the US dollar loses its position as the global reserve currency, the consequences for America are dire. The dollar's valuation stems from its lock on the oil industry - if that monopoly fades, so too will the value of the dollar. Global fiat currency relationships will change. Gold will rise. Uncertainty around paper money always bodes well for gold, and these are uncertain days indeed.

GOT GOLD?

January 27 2012 at 10:38 AM Report abuse rate up rate down Reply
Joseph

Travis: You, almost, not as, could send, could distrupt, all a bunch of b/s. Word's that you stick in a story that "COULD" happen, and chances won't happen. If you were doing this type of opinion during the early 70's oil embargo, I can imagine the b/s you'd be stating like oil "COULD" dry up within the next ten year's, and more then likely disappear in twenty. Where are those expert's today? Give your bud on Pennsylvania Avenue a call, for he may give you a few could, almost, or not as. And, I bet you consider yourself an expert (in every thing).

January 26 2012 at 4:54 PM Report abuse rate up rate down Reply
exp57

Gee, I guess we don't need 5,000 pound trucks and SUVs after all.

January 26 2012 at 8:56 AM Report abuse -2 rate up rate down Reply
1 reply to exp57's comment
janswizz

What are you going to pull your boat or RV with when you go on vacation ? A Chevrolet Volt perhaps, or maybe a Nissan Leaf ?

January 26 2012 at 10:36 AM Report abuse rate up rate down Reply
1 reply to janswizz's comment
exp57

Sell your RV or boat.

January 26 2012 at 2:21 PM Report abuse -2 rate up rate down
tktuttle

Reporting it will make it so. Now that the thought has entered the public's mind and they are expecting it, Big Oil can jack up the price and we'll be okay with it because it was "predicted".

January 25 2012 at 5:22 PM Report abuse +1 rate up rate down Reply
Sekinu2

Obama would love this. His open statements of wanting $7 to $8 a gallon gas would just make him smile as his consistant plan of killing the working middle class forcing people into a government controled poverty level would make him so proud.

January 25 2012 at 4:27 PM Report abuse +2 rate up rate down Reply
Ron

Gas is DOUBLE, 100% higher since the messiah took office! Thanks you Obama drones!

January 25 2012 at 2:21 PM Report abuse +1 rate up rate down Reply
1 reply to Ron's comment
exp57

Gas was higher under Bush.

January 26 2012 at 8:54 AM Report abuse -3 rate up rate down Reply