Gas and Oil Prices Are Near an All-Time High . .
Gas and oil prices are once again approaching an all-time high, although they haven't quite matched the level of 2007-2008 as yet. The graph at left shows the retail price of gas, both in actual dollars (the darker line) and adjusted 2012 dollars. Gas actually rose over $3.50 a gallon in 1980-1981, although it only cost $1.40 at the time. That's how much the value of the dollar has changed. The 1980 run-up was the result of oil price controls - which actually drove prices up by discouraging domestic production - and the cut-off in world supplies as a result of the Iranian Revolution and the outbreak of the Iran-Iraq War. Price controls were removed by the Reagan Administration in 1981 and the price quickly plunged due to the outburst of domestic drilling. They continued a gradual downward trend, reaching a low point in 1999. In 2002 they began a general upswing that has continued ever since, except for the interruption of the 2008 recession. The 2008 peak may have been part of a general inflationary bubble that ended with the collapse of the housing market.
As in 1980, events in Iran are now having a big influence. The effort to halt Iran's nuclear ambitions and the response of threats to close the Straits of Hormuz have sent oil futures soaring. This probably accounts for the recent spike. But long-range trends are also playing a part. The steady climb since 2002, interrupted only by the steep recession, could be attributed to the end of "easy oil" and the rise in demand from China, India and the developing world. The transition to more high-priced reserves - offshore oil and the heavy Canadian tar sands - is now setting the marginal price.
The trend is mirrored in the price of Brent crude, which is illustrated in the right-hand graph. Brent crude is a benchmark price for European oil set by North Sea deposits. The numbers here track back only to 2007. The dark line traces the price in U.S. dollars and the light brown line indicates the price in the Euro, which has declined in value since the emergence of the European debt crisis.
The long-range pattern for both oil and gasoline prices is now upward, a reversal of the trend of the 1980s and 1990s. We may not have reached any Hubbert's Peak, but the general trend of increasing world consumption and harder-to-access supplies is definitely putting upward pressure on prices. All this contrasts mightily with the price of natural gas, which is now so low that the industry lives in fear of a total market collapse this summer.