Why are gas prices rising?

April 19, 2012

BY: Robert Hallberg, Topics: Oil

The price of gas has steadily been increasing since around year 2000 and we have already seen gas prices in the $4 range in many parts of the country this year. If this trend continues we may well see record high gas prices this summer.

What is behind the high gas prices? Is it the âevilâ oil companies that want to squeeze every penny out of the consumer? Or are there more fundamental reasons behind the higher prices of gasoline?

One popular theory in the oil industry says that we are running out of known reserves of oil. The idea of âpeak oilâ was first introduced by M. King Hubbert, a geophysicist working for the Shell Oil Company. His theory said that the production of oil in a field, a country, or the entire planet would look like a bell curve. It would increase until it hits it peak and continuously fall thereafter. There may be some truth to this argument. We have already seen declines in production in many of the enormous oil field that were discovered and developed in the 1970s. For example, the North Sea hit its peak in the mid 1980s and has since been in decline. The same is true for the Cantarell oil field in Mexico, one of the worldâs last giant oil discovery. It started to decline around 2003 and it yielding less and less oil.

But regardless of declining production in some places around the world the US has actually become a net oil exporter for the first time since 1949. Consumption of oil in the US has been declining since 2007 while production has increased. This has led to an increase in available oil and the excess has been exported. Excess capacity domestically should in theory lead to lower prices, but we have not seen a reduction in prices so far.

Perhaps the high price of gas is not because of oil rising in price but because fiat currencies are losing value. The US dollar and most other fiat currencies have lost about 80% of its value against gold over the last decade. When you price oil in dollars it looks like the price is increasing, but it is really the value of the dollar that is falling. If you compare oil to other commodities and tangible goods you will see that the price of oil is not really up.

If you price oil in gold you will see that the price of oil measured in gold is actually lower today than it was in 1970. The value of oil has remained the same for the past 40 years while the unit of measure has depreciated. The chart shows the price of oil measured in gold.

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