Oil at $200 Will Wreak Havoc

Imagine paying $5.75 or more for a gallon of gasoline. How about $7 for a gallon of heating oil. Now consider shelling out $6.50 for a gallon of milk, or $5 for a dozen eggs.

 Welcome to the United States of America if the price of oil surges to the once unthinkable level of $200 a barrel.

 “From the consumer perspective, every single item we buy in a store gets there by ship, railcar or truck, all of which have seen dramatic increases in the cost of fuel. And that is factored into the price we pay for everything,” said Eric DeGesero, executive vice president of the Fuel Merchants Association of New Jersey.

Oil is hitting record highs seemingly every day, and as the price of oil goes so goes the price of gasoline. Americans are now paying on average about $3.50 a gallon at the pump, and much more (upwards of $4 a gallon) in areas with high gas taxes such as California and New York.

Now, in an almost apocalyptic prediction based on expectations of reduced supply and increased demand, comes the $200 a barrel scenario.

Citing an environment conducive to what it describes as a “super-spike,” the venerable investment bank Goldman Sachs has issued a report that makes a case for just such a price surge.

“The possibility of $150-$200 per barrel seems increasingly likely over the next 6-24 months,” the report states.

Goldman Sachs’ energy analysts based their prediction on “notable declines” in production levels in important oil-producing regions like Mexico and Russia even as global demand continues to rise.

None of this bodes well for U.S. consumers – especially when they pull up to the gas pump.

Tom Kloza, of the Oil Price Information Service, broke down the bad news.

At around $120 a barrel, the current level, motorists will pay:

This brings the retail price of a gallon of gas to around $3.60 to $3.75, where Kloza expects U.S. prices to reach in the next few days. (Higher on the West Coast and New York, where gas taxes have pushed a gallon of gas above $4.)

As the price of crude oil increases, each additional $10 per barrel of crude oil will translate into about 25 cents per gallon at the pump, according to Kloza.

Thus if crude oil hits $150 per barrel, U.S. motorists can expect retail prices to jump about 75cents per gallon, landing somewhere in the $4.50 per gallon range. At $175 per barrel, gas shoots up to $5 a gallon. And at $200 per barrel it hits $5.75 gallon of gas. (Again, higher on the West Coast and New York.)

All of this could be further impacted if U.S. refining capacity was crimped for any reason -- most likely by a hurricane in the Gulf of Mexico.

Kloza said if that happened this year it could add another 75 cents per gallon at the pump, pushing gas well over the $6 level.

But all of this is hypothetical, Kloza noted . “These are all wonderful ‘thought experiments’ and flights of fancy. I think these numbers are in the realm of possibility, but not probable,” he said.

Businesses tied to the distribution of fuel and which purchase in bulk will also suffer. Consider tanker trucks rolling up and down the highway carrying 9,000 gallons of gasoline. At $150 to $200 a barrel of crude, the price of that shipment comes to about $45,000.

That’s up from $8,000 less than a decade ago.

In order to cover this rapid increase, trucking companies will have to dramatically change their methods of cash flow, likely requiring clients to put up more money faster so that the trucking companies can pay their suppliers.

Heating oil companies that also buy in bulk are in the same bind.

“Everywhere you turn it’s having a dramatic, negative impact,” said DeGesero. “It’s hard to even conceive of what the world will look like (if oil hits $200 a barrel).”

With so much of peoples’ paychecks disappearing on necessary items such as fuel and food, there will be little money left for discretionary items such as entertainment, travel and electronic gadgets.

And if U.S. businesses, already bloodied by the credit crunch brought on by the sagging housing market, are forced to take another hit, a severe and prolonged economic downturn is inevitable, said DeGesero.

Referring to the anemic first quarter U.S. growth rate of 0.6 percent, DeGesero said “that could look robust if we go to $200 a barrel.”