Diesel and gasoline prices are likely to rise as much as $0.20—0.30 more into June before any price rollback occurs. Gasoline prices are already 25% higher than a year ago and diesel prices are up 45% over the last year. The real price for both fuels, after adjusting for inflation, is the highest ever, recently surpassing the previous record price level in the early 1980's. But there is no reason to expect that either fuel will not be available this year or in 2009 to buyers willing to pay the requested price. This is because a shortage of crude oil is only part of the reason for soaring fuel prices.

Four factors contribute to the 2007-08 surge in oil prices.

• First, oil demand exceeded oil supply for the first time in many years, reducing inventory and pushing prices up sharply as always happens in an auction market.
• Second, the exchange value of the $US dollar fell 11% since the beginning of 2007 raising the price of all products whose prices are set in international markets.
• Third, significant environmental costs were imposed on US refiners who then passed as much of the cost as they could onto fuel users.
• Fourth, financial speculators, anticipating rising fuel costs, bought fuel cheap to later sell for a higher price. This process adds to demand as perceived by suppliers and removes some supply temporarily from availability to buyers. The consequence is higher prices.

Note that the environmental cost factor applied only in the US — it did not raise fuel costs elsewhere in the world. Also, the exchange rate impact in the $US worked in reverse in most of the rest of the world where currencies appreciated against the $US. The Canadian dollar, for example, appreciated 15% against the $US since January 2007 giving Canadian fuel buyers a 15% discount instead of the 115 premium US buyers had to pay.

The rise of demand relative to supply is the core problem that significantly contributed to setting off speculation and the decline of the $US. The outlook for the demand supply balance and sufficient inventory to cushion any demand surges is not good. The added demand from China and other rapidly industrializing countries will ebb only slightly in the next few years from the recent their10% annual growth pace. Compare this to the 1-2% rise in oil demand in the US in a good economic year. Transferring manufacturing from the US and Europe to developing countries caused a substantial net gain in oil consumption because these countries use much more oil per dollar of GDP.

However, the supply restraints are just as significant. Over the years we have accepted the nationalization of oil fields and refineries in many countries. Except in the Middle East where the national oil companies hired back the US and European oil companies to manage their oil business, nationalization has set off the gradual decline of oil supply capacity. Oil supplies from Iran, Iraq, Libya, Russia, Mexico and Venezuela are all declining because of poor management of oil fields and insufficient investment in new fields. In addition to this, production has been restrained in many countries because the oil fields are in war zones where the "outs" damage wells and cut pipelines. This list includes Nigeria and other African countries as well the Andes countries in South America. The supply problems are political with no resolution likely soon.

The role of speculative demand is unique. Speculators do not use oil. They do not want it delivered to their office. They buy and hold oil only when they anticipate rising prices. But they will dump their oil holdings when they come to expect steady or falling prices. They have correctly anticipated rising prices in the last year and half, adding as much as $30 the price of a barrel of crude oil. Soon, probably measured in months, they will sell their oil and leave the market when they see better profits opportunities in another commodity.

The retreat of speculators from the oil market is the most likely reason to anticipate falling fuel prices beginning this summer. There will also be a contribution from slowing oil demand growth in Asia as Asian exports to the US suffer during the US recession. There will also be a seasonal contribution. April and May are when US refiners shut down to change over to the long list of environmentally required gasoline blends mandated in different parts of the US. This is a very expensive process which significantly cuts fuel supplies for an extended period.

Contractors and shippers should expect fuel prices to be declining from the 4th of July to Thanksgiving but this will only bring gasoline down at most to $3.00/gal and diesel to $4.00/gal. The new supplies or demand reductions needed to reestablish generous oil inventories are not in sight for the next few years.