Archives: Gas Prices unlikely to hit $5 nationwide

Originally published in February 2012
Simon Nguyen

Every year at this time, the media dutifully starts to speculate whether or not gasoline prices will hit record highs in the summer months. Last year, it was about Libya and the Arab Spring. The year before that was about possible inflation caused by the Federal Reserve’s quantitative easing.

Fortunately, average gas prices in those years never did spike to the $5 mark some had feared. Are we facing a similar situation this year?

One of the reasons why gas prices in the previous three years failed to match the media’s lofty predictions was because the economy was still in a malaise state. Demand was so weak in 2009, 2010 and 2011 that even very high oil prices, due to speculation and Middle East turmoil, could not muster a bigger jump in gas prices. If gas prices are to hit an all-time high in 2012, there would have to be a dramatic increase in demand.

While recent economic data have been positive, they are coming off a very low base. Take the Fed’s growth forecast for 2012 for example. The economy is expected to grow between 2.2 and 2.7 percent. These numbers are decent compared to those of Europe, but are not robust enough to result in significantly higher energy demand.

Moreover, the Fed is also forecasting the unemployment rate would stay above 8 percent through this year. This means Americans are unlikely to consume more gasoline.

The main driver behind speculations of record-high gas prices has been the increased tensions between Iran and the west. Iran, one of the world’s biggest oil producers, recently announced it will halt some oil exports to Europe.

Although concerns over the nuclear standoff are certainly valid, the predicted impact on gas prices is probably overstated. There is no perfect correlation between oil prices and gas prices. Even if oil prices were to hit record highs, it does not mean average gas prices in the U.S. will reach the historic milestone of $5 a gallon.

There is also a political angle. In this election year, the prospect of record gas prices is Washington’s worst nightmare. Consequently, it is conceivable that President Barack Obama would open the U.S. Strategic Petroleum Reserve to help ease gas prices. It is also conceivable that Congress would pass legislation such as a gas tax holiday to lower prices.

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