Oil Rise Could Push Gas to $4

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The price of crude futures reached $107 on concerns about the unrest in Iraq. That is the highest it has been since September, and several analysts expect the price to surge higher if the problem seriously disrupts the supply of oil from the country. Gasoline prices have hovered at about $3.65. However, that could change in a matter of weeks.

Crude prices (WTI for July delivery) were only $95 three months ago, so the price is up 12% in 90 days. While gas prices do not move exactly as oil does, because of refinery and transportation costs, the marriage is close. Under current circumstances, it would not take much more of a spike to press the average cost of a gallon of regular in the United States to $4.

Iraq’s issues are not alone as a possible reason for oil price increases. Tension between Russia and Ukraine moved prices higher a month ago. Since the trouble between the two countries has not ended, the effects of the friction could roil oil markets again. In tandem, greater problems in Ukraine and Iraq could easily move oil up another $10 a barrel. There is certainly precedent for political problems in oil-rich nations to cause unexpected increases.

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Gas prices have already reached close to $4 throughout much of the United States. In California, the price of the average gallon of regular is already above that at $4.08. California is home to 38.3 million of America’s 316 million people. The price of gas has reached $4.02 in Illinois, which is the fifth most populous state, with 12.9 million residents. Oil prices are also above $3.80 in Ohio (11.6 million population), New York (19.7 million) and Michigan (9.9 million). So, in those states, it is not hard to imagine that gas prices could be well above $4 in a matter of weeks.

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Experts have often debated the impact of high gas prices on gross domestic product (GDP). Very few believe it is positive. Among households with members who are heavy drivers, and households with low or very modest incomes, there is often not much left after the costs of housing, clothing and taxes. Members of these households can quickly leave the consumer markets. What is already a fragile recovery of U.S. GDP becomes even more brittle.

If the situation in Iraq is not resolved, and particularly if it worsens, gas prices will be at $4 soon.