Special Report: Where Do Gasoline Prices Go From Here?

Where do gas prices go from here?

Up. Sorry to spoil the ending of this article, but that is a fact. The rapid raise of oil will translate to higher prices at the pump in the short term. And even after the immediate turmoil in North Africa and the Middle East passes, world production of oil is getting more costly, more dangerous, and more difficult to maintain.

The more interesting question is how high will gas prices spike in the short term, and what should we be watching to clue us in to when the rise will stop?


A few weeks back I wrote about the turmoil in Egypt affecting oil prices, and how it was mainly over speculation that the upheaval may spread (especially to more impacting countries). Recall, Egypt is a net importer or oil, and has minimal impact on the global supply, so that rise in oil prices was totally speculation.

Unfortunately, the upheaval has in fact spread, and a somewhat under-the-radar country has triggered another 10-15% rise in oil prices. That country – Libya, is a net exporter of oil.

hile Libya produces 1.5 to 2 million barrels per day, that is a “drop in the bucket” compared to what other countries can and do provide. In fact, Saudi Arabia can single-handedly increase production to offset the potential loss from Libya.

So again, why is Libya driving prices up? This answer is slightly more nuanced than the Egypt answer was.

Libya's Oil, Fear, and Speculation

As mentioned, Libya is a net exporter, so a disruption in their contribution to the global supply does have a short term impact on markets until others can increase production. However, part of the issue is that the oil found in Libya is the low sulfur, easily refined “sweet crude”, which is more desirable than ‘sour crude’ found in many areas.

The more important reason for the steep price increases is the same one that we discussed regarding Egypt – the fear (speculation) of further spreading of the unrest. Libya has proven that it can spread, and to a country that wasn’t really thought to be a top 5 at-risk country. Now the concern is that Algeria may be next. And Saudi Arabia still looms as a worst case scenario.

What To Watch For

There are three items to watch that will tip off where oil is heading next.

1. Will Saudi Arabia (and OPEC) follow through and step up production if/when/as Libya production falters?
2. Will the unrest spread to other important countries? Keep an eye on Algeria news in particular, but don’t ignore Kuwait.
3. Pay particular attention to Saudi Arabia. While the chances of significant government disruption is low, Saudi Arabia produces so much more oil than other nations, even a small hint of problems will provoke speculation.

What You Can Do

I’ve talked a lot about ways to reduce gas consumption and improve fuel economy. The problem is that many of these methods are very difficult for drivers to see on a daily basis. Slowing down, using cruise control, and ensuring fully inflated tires can improve fuel efficiency by as much as 25% (depending on what your previous driving habits were – perhaps more). But in a single commute or two, the fruits of these efforts aren’t clearly seen.

More drastic savings can be made by car pooling when possible (remember you do not have to carpool everyday – maybe just Mondays and Fridays, for example) Consider changing your commute times to coincide with periods of less traffic, telecommute if allowed, or seeing if you can change your work schedule to perhaps work longer hours over fewer days.

The best thing we can all do is change our long term habits to reduce oil consumption. Remember that gasoline is only a fraction of the oil consumed in the USA. Plastics and fertilizers directly use petroleum, so keep that in mind when you make purchases.

From a pure financial standpoint, there are investments that can be made within an IRA or other brokerage account that can help dampen the affect of oil price changes. This site is not an investment site, but I wanted to provide a few ideas that readers may research further.

For example, ETFs exist that track oil prices (DBO is one example). There are also inverse ETFs (DNO is an example) that will produce returns if/when oil prices drop. And oil companies themselves, such as Chevron and Exxon, generally profit when oil prices increase (though refiners often see decreases in their stock prices). Obviously, commodities, and especially oil, are extremely volatile, so investments should not be made lightly.