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Gas prices drop for sixth straight week ... but 2012 will likely be the most costly year on record.

Earlier this year many prominent gasoline analysts predicted $5 a gallon gasoline this summer. In fact, we turned down several media interviews because we were unwilling to parrot hysterical predictions that gasoline prices would exceed $5 a gallon in 2012.  While we said it was "possible," we also made it clear that it was "highly unlikely."

Now the conventional wisdom is that gas prices have probably peaked for the year.  It sounds like good news, but for Californians, and possibly the rest of the United States, this may be the most costly year on record for gasoline.  In addition, it is likely that gas prices could start climbing again if troubles arise in the Middle East, or there is a spate of refinery problems on the East or West Coast.

Consider these facts

The mainstream media has been reporting the "Good news" that gas prices in California have fallen for almost six weeks in a row. On March 15, the average price of gasoline appears to have peaked in San Diego at $4.38 a gallon. It has declined by 18¢ a gallon (less than a half cent per day) to the current average of about $4.20 a gallon.

This trend sounds like good news, and it is for cash-strapped consumers, but when you compare this price to previous years it is still the highest sustained price on record for gasoline prices in any year ever. At this time, the average price per gallon for gasoline in the Year 2012 has been $4.07 a gallon. 

The table below shows recent average prices by year:
 

SAN DIEGO Average gas price
for the Year 2012 = $4.07 

 
Average gas prices for other years   

   (January 1, through December 31 averages)

 
2011 Gas Average 3.81       
2010 Gas Average  3.09       
2009 Gas Average 

2.64       

2008 Gas Average 3.45       


What's noteworthy about his table is that in 2008, the record high price for gasoline was $4.64 a gallon.  Last December, we predicted that it was unlikely that we would break this record in 2012, despite plenty of media hysteria predicting $5 a gallon gasoline this year.  Instead, we predicted that gas prices would surge by a predicted range 50 to 90 cents a gallon (that's an average price hike price of 70¢ a gallon). We also predicted that gas was unlikely to break San Diego's all-time record high of $4.64 a gallon, set in June of 2008.

This isn't 2008 - speculation is a factor, but less of a factor

First, the record-setting prices of 2008 were due to speculative gaming of global oil markets. In June of '08, Goldman Sachs was fueling the fires behind an inflated oil market by publishing reports of oil prices going beyond the $200 per barrel price. Oil reached its record high of $149 a barrel in intraday trading in the summer of 2008.  The price was outrageously inflated.  To put things in perspective, you could have purchased extra-virgin olive for cooking at a cheaper price than $147 a barrel.

But like all investment bubbles, the bubble finally burst, and later that year oil was going for less than $40.00 a barrel. In the meantime, market gaming by Goldman Sachs and their ilk forced six of America's seven major airlines into bankruptcy.

Oil is not in a bubble now.

As of today, West Texas Intermediary (WTI) was selling at about $102 a barrel. There is room for the price of WTI and Brent Crude to fall by as much $10 to $20 a barrel, but it is unlikely given ongoing unrest and war jitters over the prospect of military action in Iran. And even if the Iran threat goes away, any kind of economic growth will probably stop significant declines in the price of oil because demand is down right now.

What it means:

What all this means is that high oil prices are here to stay. And that means high gas price, too. We predict that when 2012 comes to a close, it will go on record as having the highest average gas price for any year ever in U.S. history. And while we hope that gas prices have peaked for the year 2012, we aren't willing to make that prediction yet.

Newt Gingrich recently said he could lower gas prices below $2 a gallon.

This promise is a pipeline pipe dream:  Even if oil prices collapse to less than $85 a barrel, the cost of the oil in a gallon of gasoline would be $2.00 or more per gallon. Further, the lifting and shipping costs of shale oil and oil from Canadian tar sands is estimated at $50 or more per barrel. The lifting cost of Saudi sweet crude is estimated at around $12 to $20 a barrel.

Saudi Arabia and U.S. presidential elections

One of the more intriguing aspects of oil prices are the politics of oil. First, there is a direct correlation between the popularity of a president and the price of U.S. gasoline. The lower the price, the more popular the president. Historically, the Saudis have increased oil production prior to presidential elections in a show of goodwill toward the incumbent president.  They have promised to do it again. For an analysis of Saudi Arabia's role in U.S. politics, click here.

The Bottom Line:

It is very likely that this year set the record for being the most expensive year ever for gasoline -- both locally and nationally -- even if we don't break any records for highest-ever oil and gasoline prices.