Are We Headed Toward $5-a-Gallon Gas?

TheStreet.com

NEW YORK (TheStreet) -- Here we go again. With gas prices spiking so early in the new year, it's easy to predict that the U.S. will see $4-a-gallon gas sometime this summer. I would even put the chances of $5 gasoline at one in three.

And it's not the pure fundamentals that are driving prices higher right now, which makes this situation even more frustrating.

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Gasoline demand in the U.S. is at 10-year lows, and we are swimming in refined products. In fact, the U.S. has become a net exporter of gasoline for one of the few times in its history. Our cars continue to get more efficient, and we're even driving less -- our total miles on the road have been dropping steadily for the past three years.

So wait a minute -- more supply, less demand -- why are prices headed upward then?

The truth is that supply threats, combined with the overwhelming influence of money chasing the oil trade, are driving the price of fuel higher. Let me try to map out this "perfect storm" of rising energy prices.

Middle Eastern tensions are the kindling for the fire of rising prices. Every day seems to ratchet up the war of words between Iran and the West.

The U.S. continues to add pressure to its financial sanctions, which are now helping to crater Iran's currency, the rial. The U.S. has limited access to any international banks that continue to do business with Iran and gained tremendous cooperation in the plan to boycott Iranian oil supplies.

The EU has pledged to end imports of Iranian oil as of July 1. Meanwhile, the Chinese have cut their imports of Iranian oil by more than 10% as have the Indians and Japanese, by far the three largest customers of Iranian crude.

Of course, the specter of Israeli military action against Iran continues to loom. And the Iranians have continued to rattle their own sabers, threatening to close the Strait of Hormuz, intimating their own preemptive military actions and cutting off oil exports to Britain and France. There is a very strong threat that Iran's 3 million barrels a day will exit the global supply chain.

Now, throw a little lighter fluid on this kindling of geopolitical unrest and you've got a recipe for steadily rising prices. That lighter fluid is the unfettered access to financial oil products.

One factor that no one bothers to look at, but which has become vital to oil prices, is the equity indices, which are now reaching their highest levels since June of last year and since the spring of 2008. My book Oil's Endless Bid describes this in detail, but the most simple truth is that money flows as easily into hard assets such as oil as it does into the stock market.

So it's not just speculators buying oil on the prospect of continuing tensions in the Mideast and the removal of Iranian barrels from the global market that are driving up energy prices.

It is the hedge funds, money managers and institutional funds adding to their commodity holdings as they continue to buy stocks.

It sounds bizarre, but it's true: Asset investments -- bets on oil -- are costing us every time we fill up.

And with the Iranians refusing to back down on their nuclear aspirations and stock markets around the world in recovery mode, only a major financial setback in Europe or China is likely to derail this oil rally.

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