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an average of $1.60 to $4.11. To use an economic term, thats nuts. While the Arab oil embargo, the Iranian revolution, and the Gulf War, not surprisingly, provoked big price jumps at the pump, not one of those events caused a two-year round trip as dramatic as the one weve just seen. And the geopolitical drama that caused the most recent spike, sending the price of a barrel of crude up to $145 on July 4, 2008? Well, there wasnt one. So why did gas prices leap 100 percent in 12 months only to plummet to $30 on December 23, and then more than double, to a recent peak of almost $75 on August 21? And how much will it cost you to fill up your tank in the coming years?
What to Do About It
Given that speculation is one of the villains in volatility, the natural political temptation is to whiplash the oil traders. And naturally, the traders are against any new restrictions, arguing that they provide necessary liquidity to the markets, allowing end users like airlines to hedge. The thing is, the latter seem to be ungrateful for the favor. The Air Transport Association denounced the destructive volatility in oil markets at the CFTC hearings on July 28; Delta Airlines (DAL) estimated the 2007-08 oil bubble cost it $8.4 billion. Consequently, position limits that restrict the number of contracts traders can hold are likely, as are increases in margin requirements and new requirements to reveal who is trading what and when. But this will not be enough. Volatility is likely when there is a tight fit between supply and demand. So the U.S. could also try to create a little more breathing room by reducing its consumption of oil and boosting its own production. The one and only certain way to reduce consumption is to raise prices; from November 2007 to October 2008, during the course of the Big Price Run-up, Americans drove 100 billion fewer miles than the year before. You wont hear this on Capitol Hill, home to the illusion that conservation and cheap gas can occur simultaneously, but a higher tax on gas could help to stabilize prices. So could opening up more territory for drilling. And so would some assurance that there is a plan to finance government spending without simply printing money.
Wise consumers, then, will act as if prices have already risen, buying more fuel-efficient cars, shifting away from heating oil, and taking commuting distance into account when eyeing real estate. And it cant hurt to have some exposure to energy in your portfolio if you have to pay four or five bucks for a gallon of gas, it might offer some comfort to know youre paying yourself a nice dividend. You might as well get used to it, because $2.50 gas will not be with us for long.