Will Gas Prices Keep Rising?

In 1985 during Reagan’s presidency, the average home price hit $100,800 and a dozen eggs cost a whooping $.80. Those were the good ‘ole days when gas prices were $1.20 a gallon. How did gas prices jump up to $3.85 a gallon? Lets analyze why gas prices rise and assess whether they’ll continue to go up.

WHY DO GAS PRICES GO UP?

Hypothesis #1 – Gas Prices Rise When The Dollar Depreciates

To combat deflationary and recessionary pressures caused by the 2007 mortgage crisis, the Feds initiated quantitative easing (a.k.a. pumping cash into the economy) in 2008. In the last couple of years, the Fed purchased over $2 trillion in bank debt, mortgage-backed securities, and Treasury notes and added it to their balance sheets to infuse cash liquidity into the hurting economy. Unfortunately, flooding dollars into the financial system also creates inflationary pressures. By the definition of inflation (a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency ), the volume increase or devaluation of the dollar should inevitable lead to a rise in the prices of all commodities including oil, silver and food.

A rise in oil prices starts a vicious cycle. A rise in oil prices causes a bigger current account deficit between the US and oil-exporting nations. A widening trade deficit gap can only be prevented by depreciating the dollar. I am not suggesting that a weak dollar CAUSES oil prices to increase; however, I’d suggest a strong negative correlation between the dollar and oil prices as seen in the graph on my blog at http://zempower.com/archives/560. The negative correlation seems to fail from 1983 to 1985.

As seen in the Dollar Index graph on my blog at http://zempower.com/archives/560, the US dollar has decreased by over 50% since 2002. As the US dollar depreciates, oil and commodity prices will go up even further.

Between 1985 and 1991, the US current account deficit went through a correction (becoming a .8% GDP current account surplus) that led to a 30% depreciation in the US dollar (as seen in the chart above from 1986 to 1987). The current account deficit correction resulted in 1) a 30% depreciation in the US dollar 2) increases in inflation 3) higher interest rates 4) the 1987 stock market crash 5) the start of a four year recession and 6) higher unemployment.

Compare the graph from my blog at http://zempower.com/archives/560 for the 1987 to 1991 current account correction to the the current account deficits from 2000 to 2010. This is alarming! You can see why I forecast the coming of a global depression (read prior blogs).

Hypothesis #2 – Gas Prices Rise When Global Demand Increases

China has now surpassed the US as the #1 consumer of oil in the world. The U.S. Department of Energy raised its outlook for global oil consumption to a record-high 88 million barrels a day in 2011. Most of that growing demand is expected to come from the emerging markets like China and India. I’m not going to go into too much detail about gas supply and demand because this information can be found easily across the Internet.

TECHNICAL ANALYSIS

The graph on my blog at http://zempower.com/archives/560 shows the exchanged traded fund (ETF) for United States Oil Fund (Symbol: USO) from the end of 2010 to now. As seen on the MACD and Stochastic charts, the USO ETF started a bullish trend on February 18, 2011 and surpassed it’s continual resistance level at $39 a share. These are strong bullish symbols that the price of oil will continue to rise.

CONCLUSION

Because the US current account deficit stands at over $800 billion a year, its not hard to forecast that the dollar will follow a bearish trend in the years to come. If the Fed continues quantitative easements, we can further expect downward pressures on the dollar. We saw a strong negative correlation (rather than causation) between the dollar and oil prices. We also see increases in the global demand for oil especially in China and India and bullish signs in our technical analysis pointing towards oil prices continuing to rise. History shows that all bull markets end. I forecast that oil prices will continue an upward trend until we see a major crash in the US stock market.

By: Zempower

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