Is $7 Per Gallon Gas in Our Future?

June 29, 2008— -- It took a little over a year for oil to go from $70 a barrel to $140. OPEC predicted this weekend it could hit $170 by the end of the summer, and Goldman Sachs predicts $200 a barrel by year end. So, what will the world look like at $200 a barrel?

The answer is not very pretty. Christopher Knittel, an economist at the University of California, Davis, says, "the transition from cheap oil to expensive oil is going to be painful for many. We're going to see large changes in our infrastructure, our vehicle fleet, the price of food."

Your Car

The price of gas could hit a whopping $7 per gallon, which translates to $120 to fill your average sedan. And even more if you own a sport utility vehicle.

As reported recently by CIBC World Markets chief economist Jeff Rubin, these prices could force 10 million vehicles off U.S. roads over the next four years.

Your Home

Higher gas means you might decide to drive less -- and maybe even reconsider where you live.

"We'll probably start seeing pressure to move closer to employers, which typically means closer to cities," conjectures Knittel. "We're going to see pressure of consumers moving back to the cities."

Sprawling suburbs simply may stop sprawling, bringing down home values for owners who live too far from employers. And cities may see an influx of new residents, moving closer to their workplaces to take advantage of public transportation.

Urban areas are already seeing a spike in ridership, and an increase in these numbers may force cities to spend more money on expansion and upkeep.

But the domino effect doesn't end there.

Your Stuff

What about all those toys and gadgets that make up your modern life? Chances are they weren't manufactured close to home, which means the cost of transporting them to you will boost their prices.

"So many of the cheap products that we buy from China -- whose actual physical cost of producing the products are very low -- but the bulk of their products, or the bulk of their price, comes from transportation," says Knittel.

Toys from China, plasma televisions from Korea, and clothes from Taiwan -- their prices could all increase. And those products actually made with oil, such as shaving cream, cosmetics, and crayons -- their prices often follow oil upward.

Your Retirement

But a more pressing concern is your retirement. If you are in or near retirement, you probably planned your future finances based on a world with cheap oil. That financial model may no longer hold.

"It is a new economic world," says Knittel. "The high oil prices are here to stay, and we're going to have to adapt to these high oil prices in terms of decisions, such as vehicle choice, where we live, and the jobs that we take."