Reply #10: $4 a gallon Gasoline will start a lot of problems [View All]

[happyslug]

First inflation will go double digits over a period of 3-6 months. I takes about four weeks for a price increase at well-head to hit your local gasoline pump (And 8 weeks for a price DROP to hit your local pump, this is called price "stickiness" an economic concept going back to at least the 1920s). Truckers will want more money to pay for higher diesel fuel prices (As till barge operators, farmers, and even overseas shipping). Sooner or later these will hit local prices. There will be a delay as, as first, most users of oil try to absorb the costs, but as more and more realize they can NOT, the price will go up. After 2-3 months all incentives to absorb the costs will be gone (as will most profit margins) and the price for everything will go up.

The Stock Market will collapse, Most of the Money going into oil will go to producing nations NOT the Seven sisters (Through owners of domestic wells, which tend to be the Seven Sisters, will also see a huge increase in profits) and it has to come from someplace. Given the inflation mentioned above, just printing more money will NOT be permitted. Printing money and/or dropping the interest rates is the best way to boost the economy, including the Stock Market, but at the cost of higher inflation. The problem is the high inflation caused by the price of oil going up will cause inflation in itself and to fight inflation the fed will have to CUT production of dollars AND increase interest rates. It be the 1970s all over again, stagflation.

Given that the Soviet Union no longer exists, Europe will be free to look to its own self-interest rather then trying to keep America Strong to oppose the Russians. In fact Europe will pay more money to Russia in exchange for Oil and Natural Gas (Oil production in Russian seems to have hit a high and starting to decline, but Natural Gas production is increasing). Both oil and Natural gas prices will increase.

The Strategic Oil Reserve will be opened, but all it will be is to increase revenue to the Federal Government since the Federal Government will sell the oil on the open marker (Where Europe, India, China and Japan will outbid domestic US buyers). If you live in Europe or Japan, you have options other than driving your car to work (i.e. they have something called "Mass Transit" and intercity Train transit). While some of these transit options use oil, most use electricity (i.e. Streetcars and Electric Trains). Furthermore the mass transit users of oil are willing to pay more per gallon than car drivers, because they can. 50 people in a bus getting 5 miles per gallon is using 250 gallon per mile pr person, while a car, even if it get 50/gallon, is using 50 gallon per mile per person. Thus the mass transit operator (Ignoring all other costs, including the salary of the Drive) get 5 timer the per person mileage as a person in a car (Better if the car is getting less than 50 mpg, which most cars do). Thus Europe mass transit operators will outbid US car drivers because of the greater efficiencies per person (This is also true of US mass transit operators, but given the limits on US mass transit today, US Mass transit is NOT in a position to have much of an impact).

As to India and China, the poor and working class tend NOT to own cars (This is slowly changing, and is one of the reason we are facing an oil shortage today). Mass Transit is an option, but given the infrastructure of India and China, biking and walking to work is more common than driving and this will INCREASE when oil gets to $4.50 per gallon in the US. On the other hand both Countries have electricity shortages being filled by Diesel operated generators. Most of this power is for industry and industry is even willing to outbid mass transit operators so they can stay in business. This is also true of industry in Japan, Europe and the US, but it is clearer in India and China given they much smaller use of Gasoline than the US when it comes to transport.

Anyway, what I see is the US oil being sold OVERSEAS for, except for Industry, Europe, India, China and Japan will outbid anyone else in the US.

This will put a crimp in the Wars in Afghanistan and Iraq. No fuel, no Air Operations. No Fuel no tanks. No fuel, numbers become more important than a more "mobile fighting force". I can see the US losing the war in Iraq over a Six month period as the lack of fuel force the US to hold Smaller and smaller parts of Iraq. The Nuclear carriers may end up bring nothing more than transport ships to get our troops home, no fuel to fight no fuel for jets to fly them out so that leaves the Carriers to get the troops back home.

As long as the US can buy its fuel overseas, the above will NOT occur, but once the US runs out of money or is just out bid the above will occur.