Where Do Gas Prices Go From Here?

I filled up my gas tank a few days ago and noticed prices at the pump had jumped up significantly in the last few months. I remember filling up for $2.40/gallon as late as February 1st and thinking prices at the time were reasonable. Today the average price at the pump in San Diego is almost $3.15/gallon. And to think such a dramatic rise occurred with very limited media fanfare!

I'm sure most of you remember last summer when gas prices rose to over $3/gallon and the price of a barrel of crude oil rose to its peak of $79.86 and it was all we heard about 24 hours a day on the news (television, print, blogs, you name it). The price of a barrel of U.S. crude today is at $62.81 in after hours trading on the New York Mercantile Exchange. Prices have moved up from recent lows due to tensions with Iran. What would happen if Iraq destabilized, or Iran pursued nuclear weapons more aggressively or any number of other potentially inflammatory geopolitical events occurred in the Middle East? Well I'll give you a hint, if crude approaches $80/barrel again the American consumer (who last summer was still high on their home equity) will be hit particularly hard.

It is probably fairly apparent now why I have taken an interest in this. Not only because I don't like paying $60 to fill up my tank, but because I'm worried about a decrease in consumer spending and its effect on our economy.

So where do gas prices go from here? First, it is important for everyone to realize that gas prices do not move in lock step with oil prices even though oil is a huge factor in pricing. The cost of refining, marketing and federal and state taxes also effects gas pricing. For more information on the link, check out this page. But I ran a quick graph of gas prices at the pump for the past 4 years in San Diego, New York City and for the US average. There is some noise in the numbers but the trend is fairly clear. Gas prices at the pump usually bottom out every year during December and January and then rise in the Spring to hit their peak in late summer. In 2005 and 2006 the US average gas price peaked at $3/gallon. Could this be the year gas prices peak at $4/gallon?

Click on the chart to enlarge.












Some of you may be worried about the effects of gas prices on the economy, but imagine most just want to know how to save money at the pump. Well this site should give you some good ideas for saving on your own personal gas consumption. If you don't care about saving money but do care about the environment you can go to this site to purchase carbon offsets to reduce your personal carbon footprint. If you are looking for ways to hedge against a rise of gas prices through your investment account you can try to dabble in commodities (or through an oil etf like USO) though after expenses, trading costs and taxes it probably won't make sense. Though if you have access to a fuel bank, that might work. There, did we cover everyone?