Here Comes $5 Gas!

Here we go again: With gas prices spiking so early in the new year, it's easy to predict that the United States will see $4 gas sometime this summer. I would even put the chances of $5 gasoline at one in three.

And it's not the pure fundamentals that are driving prices higher right now, which makes this situation even more frustrating. Gasoline demand in the US is at 10-year lows, and we are today literally swimming in refined products. In fact, the United States has become a net exporter of gasoline for one of the few times in our history. Our cars continue to get more efficient and we're even driving less -- our total miles on the road have been dropping steadily for the past three years.

So wait a minute -- more supply, less demand -- why are prices headed upwards then? It doesn't seem to make much sense.

The truth is that supply threats combined with the overwhelming influence of money chasing the oil trade is driving the price of fuel higher. Let me try to map out this 'perfect storm' of rising energy prices.

Middle East tensions are the kindling for the fire of rising prices. Every day seems to ratchet up the war of words between Iran and the West. The United States continues to add pressure to their financial sanctions, now helping to crater the Iranian rial. They have limited access to any international banks that continue to do business with Iran and have gained tremendous cooperation in the plan to boycott Iranian oil supplies. While the EU has pledged to end imports of Iranian oil as of July 1, even the Chinese have cut their imports of Iranian oil by more than 10% as have the Indians and Japanese, by far the three largest customers of Iranian barrels.

Of course, the specter of Israeli military action against Iran continues to loom. And the Iranians have continued to rattle their own sabers, threatening to close the Strait of Hormuz, intimating their own preemptive military actions and cutting off oil exports to Britain and France. There is a very strong threat of Iran's 3mln barrels a day coming out of the global supply chain.

Now, throw a little gas on this kindling of geopolitical unrest and you've got a recipe for steadily rising prices -- and that gas is the unfettered access to financial oil products. One correlation that no one bothers to look at, but has become vital to oil prices are the levels of equity indexes, now reaching again to their highest levels since June of last year and since the Spring of 2008. My book, Oil's Endless Bid describes this in detail, but the most simple truth is that money flows as easily into hard assets like oil as it does through the stock market.

So it's not just speculators buying oil on the prospects of continuing tensions in the Mideast and the removal of Iranian barrels from the global market, it is the hedge funds, money managers and institutional funds adding to their commodity holdings as they continue to buy stocks.

It sounds bizarre, but it's true -- asset investments -- bets on oil -- are costing us every time we fill up.

And with the Iranians refusing to back down on their nuclear aspirations, and stock markets around the world in recovery mode, only a major financial setback in Europe or China is likely to derail this oil rally. And perhaps cost you $5 a gallon at the pumps this summer.