The Real Numbers Behind High Gas Prices

By Dr. Steve Sjuggerud

"So Steve, what do you think the price of gas will do next?"

My neighbor owns a car dealership. He asked me this last week. Chances are, his business is feeling the one-two punch of falling home prices and rising gas prices. It's not just his business, of course. Everyone is feeling it.

I try to be an optimist. Unfortunately, in answering his question, I couldn't be optimistic...

The answer I'm sure he wanted to hear is that $4 a gallon is crazy. And if I were better at social situations, I probably would have said so and left it at that. But I'm not that smart. Instead, here's what I said...

"First, nobody knows where the price of oil or gas is headed." You should be extremely skeptical of anyone who says otherwise. "But here's what I do know..." Then I shared with him some simple math:

• The price of oil is up over tenfold in the last 10 years. But the price of gas is only up from $1 a gallon to $4.
• Oil is the biggest component in the price of gas. Even though gas prices are higher than ever, it wouldn't surprise me to see the price of gas go even higher from here.

To give you some perspective, I put together this chart:

You think gas is expensive now? Consider this:


The chart shows the price of a barrel of oil on the left scale, versus the price of a gallon of unleaded gas on the right scale.

Adjusted for inflation, the price of unleaded gas had been relatively stable – around $2 a gallon – for nearly two decades. The price of oil adjusted for inflation had been somewhat stable as well... around $30 a barrel since 1986.

Then, boom! The price of oil shot higher. Yes, the price of gas has doubled from $2 to $4. But that's nothing compared to oil's massive moonshot.

When you realize that the biggest part of the price of gas is the price of oil... then you can easily see how the price of gas can go higher from here.

Here's where your gas money goes...



• Mostly oil (75%).
• Refining (10%), which we can't get rid of... That's how we turn oil into gas.
• Distribution, etc. (only 5%)... Hey, we've got to get the gas to you at the pumps.
• Taxes (10%)... Yes, 40 cents of your $4 gas is taxes.

Refiners, distributors, convenience stores, you name it, they've been squeezed trying to get you gas cheaply. (Exxon is actually getting out of the service station business!)

The high price of oil is what's done us in. Quite frankly, knowing what we know about the price of oil, I'm surprised we're not paying even more for gas now.

"When will we get relief from the high gas prices?" I wish I could be more optimistic with my friend the car dealer, and with you. But I have to be honest...

When I size up the two pictures above, my simple answer to you is "not soon."

Good investing,
Steve

"This article is reprinted here with permission from DailyWealth at http://www.dailywealth.com"

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Dear Fellow Trader,

Did you hear about the 60-year-old Japanese housewife who made an amazing US$3.44 million dollars in forex gains in 2 short years and tried to hide it from the Japanese tax authorities?

No?

It was printed in Reuters' "Oddly Enough" in August 2007.

Yep. $3.44 MILLION dollars!

And she made it all trading from home!

And as long as this $3 trillion dollar market grows by leaps and bounds, institutions and everyday people, just like our 60-year-old Japanese grandma, will use it to get rich.

So what about you?