More Outrage Coming at the Pump

Ugh! If you're planning a getaway for the July 4 weekend, there's a chance you may have to shell out another $1 to $1.25 a gallon at the gas pump. The agonizing figures tell the story.
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Ugh! If you're planning a getaway for the July 4 weekend, you may have to shell out another $1 to $1.25 a gallon at the gas pump, more than 40% higher than current levels.

That essentially is one of the ugly travel scenarios that emerges from a current analysis of future oil prices from Roubini Global Economics, headed by Nouriel Roubini, one of the country's more prominent economic bears.

First, let's look at the background of this unhappy prospect, which emanates from the volatile Middle East.

Thanks to promises of billions in "benefits" to an aroused populace and a strong police hand, Saudi Arabia's widely anticipated "day of rage" -- a day of threatened mass protests -- never came to pass last Friday as the monarchy of the world's largest oil exporter managed to quell student calls for widespread demonstrations throughout the country in a push for Democratic reform.

But there's no escape for the roughly 200 million U.S. drivers, who are experiencing their own days of rage at the gas pump.

The agonizing figures tell the story. The average price at the gas pump is now $3.53 a gallon, according to the website, up from $3.43 the past week, $3.12 a month ago and $2.78 a year earlier

Saudi Arabia may have evaded Friday's day of rage, but not so oil traders, says Hong Kong trader Selwyn Ortz. The reason, he explains: a lot of them were long oil, had touted the idea that Friday would be a big day for crude in wake of the expected Saudi protests, an event, some thought, that could mark the start of a rise that would drive oil to $200 a barrel.

Alas, oil was a mediocre performer that day, falling slightly to a shade above $100 a barrel. That decline largely reflected an earthquake in Japan, which is bound to depress its oil demand, at least temporarily.

Meanwhile, the sharp gain in oil prices in recent months and the threat of more uprisings have prompted investment firms throughout Wall Street to reassess where oil prices are headed, given their significant impact on the economy.

Roubini Global Economics is one of those firms currently immersed in the process of looking at future oil prices. Preliminarily, its research team has come up with three scenarios, all nasty and each of will thin your wallet and undoubtedly create more days of rages, as explained to me by Shelley Goldberg, Roubini's director of global resources and commodities strategy.

The first scenario -- to which the firm accords a 50% probability -- calls for oil prices to stay about where they are now and assumes the Saudis, OPEC and the rest of the world will make up any shortfalls. Such a scenario. of course, would suggest that higher prices at the pump -- now up to $4 to $4.50 a gallon in growing parts of the country -- will be maintained.

Roubini's second scenario -- given a 35% probability -- pegs oil at $120 a barrel, a price, it's assumed, that will hold. Based on the rule of thumb that every $10 hike in a barrel of oil is equivalent to about a $0.25-a gallon rise at the pump, $120 oil would theoretically lift the price of gas by $0.50 a gallon from current levels.

Prospects of an even bigger jump -- an additional $1 to $1.25 a gallon, or maybe higher -- are inherent in Roubini's third scenario, $140 to $150 a barrel oil or perhaps more. This one gets a 10% to 15% probability.

The higher end of the $120-$150 range, Goldberg explains, factors in such worrisome possibilities as:

--A double-dip recession

--Regime upheavals in such OPEC AND non-OPEC countries as Kuwait, Yemen, Bahrain, Syria, Oman and Sudan

--A toll on Mideastern infrastructure, notably refineries, pipelines, ships and transportation routes

--Enough supply disruptions that the lost oil cannot be made up by OPEC and Saudi Arabia

--Significant demand destruction, such as people begin to stop driving or drive less and industry stops producing or produces less

Goldberg also sees stepped-up efforts to achieve more production and supply through the exploration of more expensive oil, namely via oil sands, tar sands and deep offshore wells.

No one. of course, knows what's going to happen in the Mideast, but Goldberg figures the dye has been cast. "Higher prices will become the new norm," she says.

Steven Kopits, the managing director of Douglas-Westwood, Ltd., a leading provider of global energy services research, offers also raises the specter of another recession, noting that's what will occur whenever spending on oil and gasoline exceeds 4% of GDP, which it will do with oil at $90 a barrel.

In conjunction with this, he tells me, 10 of the last 11 recessions since World War II took place during periods of sharply rising oil prices and six of the past seven since 1973.

The bottom line: More outrage is on the way at the gas pump is a sure thing. Make sure you carry a thick wallet. on yhour next trip to the gas station.

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