Sky-high gas prices have many armchair economists thinking about the bubbles of yore: Tulips, dot-coms with no revenue model, and gated communities in suburban Phoenix. While the “what comes up must come down” rule usually applies, there’s no guarantee we’ll ever see $3 gas again—much less $2. Here’s why:
8. Peak production is a matter of “when,” not “if.” Though there is a hot debate among energy analysts over how much higher daily crude production can go, it’s almost universally accepted that we’re closing in on the end of limitless new oil discoveries. 1978 was the last year that more oil was discovered than was used, meaning that available oil we know about at a any given time has been dropping annually.
7. Speculation. After the collapse of the housing market triggered inflationary fears, investment banks, hedge funds, and commodities traders began looking to oil trading as a hedge against inflation. Sure, the dramatic increase in trading volume for oil futures has added demand to market, but there’s little reason to expect it to cool down before demand outpaces supply. Goldman Sachs says $200 barrels are on their way, and based on the way energy traders have been acting recently, it would appear that many others are in agreement.
6. The falling dollar. Since oil is traded in dollars, inflation for us means that many poorer countries can effectively buy oil cheaper. That’s good news for developing economies like China and India whose growth has spurred an explosion of new oil demand. It’s bad news for the United States, Europe, and carbon emissions.
5. Alternatives are pricey. Ethanol, oil sands, and natural gas liquids are all alternatives to light sweet crude that can be refined into gasoline. The problem is that these fuels take an incredible amount energy to extract and refine, making them viable supplements to crude when oil prices are high, but ultimately much more expensive.