Gas Prices: How High Will They Go?

Over the last couple of years, U.S. consumers have gotten used to the ups and downs of gasoline prices. If prices skyrocketed, it wouldn't be long before they crashed to earth again.

But you couldn't get too comfortable with low prices, either, since they were bound to rise again.

So perhaps this latest escalation in gasoline prices, triggered first by violence in Egypt, then in Libya, didn't make that many waves at first. After all, we seen this movie before.

Still rising

But after several weeks, prices are still going up. The national average price of self-serve regular today is nearly $3.52 gallon, up from $3.37 a week ago, according to AAA. Consumers may now be asking, "when is this going to stop?" (Read more about AAA).

It all depends on what happens in the oil-rich middle east, industry analysts say. The political violence in Libya has greatly reduced oil output from that country, but the amount really isn't enough to cause supply problems. The problem is what happens if the violence spreads to Saudi Arabia.

The Saudis are a stable supplier of U.S. oil and say they have the capacity to pump another million barrels a day, if the world needs it. But at the moment, the world doesn't need it. 

Fear

Oil prices are high, not because of any shortage, but because there is a fear of what will happen if the political violence takes down the Saudi government and replaces it with one hostile to the West, or completely indifferent about oil. With the so-called "Day of Rage" protest scheduled in Saudi Arabia on Friday, the world will be watching closely for what happens. You can expect the oil market to take its cue from the outcome.

Either the protests expose vulnerabilities in the regime or they don't amount to much. In the former case, prices could surge again. In the latter, you could actually see oil prices come down very quickly.

In July 2008, the price of oil peaked at $140 a barrel and gas prices peaked at over $4 a gallon. Are we headed there again, and maybe beyond?

Difference between now and then

There is a significant difference between 2008 and now. In 2008 we were consuming every bit of gasoline refineries could produce. Refineries were running close to full capacity. Oil traders looked at that and kept bidding the price higher.

Today, that's not the case. Refineries aren't running anywhere near capacity and supply depots are overrunning with oil. But that's not what oil traders are looking at this time.

The million dollar question is "what will happen in the Middle East?" Until there's an answer, or at least some clarity, prices are likely to keep going up.