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Why Gas Prices Will Become Volatile and Cyclical Gas prices at the pump these days are brutal. I don’t have to tell you that. Living here in San Diego, I am paying in the $4.40 range a gallon. It is a good thing I’ve got a car that gets great gas mileage, but many people obviously don’t. Regardless, there is no doubt that the cost of oil these days is translating to all parts of our economy. All Encompassing Mention oil and most people think of fuel. This makes sense since it is the most visually obvious correlation. What fewer people take the time to realize is oil is nearly all encompassing in our economy. It is a key component in plastics, your clothing, the roads your food is transported on and so on. Ultimately, oil is the lifeblood of our way of life whether we want to admit it or not. As prices go up, the cost is passed through to every part of the economy where oil plays a role – food, clothing, transport and so on. Volatility The price shocks we’ve experienced with oil this decade make it hard to remember that things were not always this way. In 2001, oil cost a bit above $1 a gallon. Ah, the good old days. Since then we have seen prices shoot up to the point where most of us don’t bat an eye at paying $3 plus at the pump. The question is why are we seeing higher prices? There are many reasons, but what is unmistakable is the supply and demand factors in oil are closely aligned these days which means prices are highly susceptible to even small changes in demand or supply. Let’s take a look at the beginning of the Great Recession. As you may recall, oil prices shot up over $140 a barrel. This sent shock waves through the world economy. In the United States, many experts believe it was the real cause of the Great Recession. I happen to believe as much, but admit it is a debatable issue and not really germane to this article. What is important is the high prices resulted in demand collapsing. People started driving less and being more frugal. The drop in demand resulted in oil prices collapsing to lows not seen in years. As the economy has slowly improved following the Great Recession, the demand for oil has increased and prices are going higher again. In short, we are entering a period of cyclical, volatile price changes – one that should continue for the foreseeable future. Speculators There are those who will argue the price changes we saw in 2008 and now are the result of speculators driving up the prices in the commodity markets. Are they correct? Absolutely. There is zero doubt that investors look to oil as an asset commodity that can generate growth. This does not mean that speculation is the sole cause of the volatile price movements. Instead, it is simply one of the factors involved. Future What can we expect to see happen with oil prices the rest of the year? It all depends on demand. If consumers can handle paying a higher amount, then prices will remain high. If consumers start turning frugal and driving less as they did in 2008, prices will plummet. Which will happen? Only time will tell. Thomas Ajava writes for ThePeakOilQuestion.com - where you can find peak oil articles, news, videos and other energy information.
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