Oil Prices Headed Higher: What You Can Do to Prepare

One of the few bright spots for consumer wallets during the recession was a steep drop in energy costs thanks to a global demand slump. Well, so much for that. With a recovery in full swing -- at least in emerging markets -- oil prices have been on a tear the past few months. The per-barrel price now sits at a two-year high of $90. That's a 30 percent jump from the recession low, and analyst forecasts suggest we should now brace ourselves for oil rising to $110-$120 a barrel in 2012.
That potential 20 percent to 30 percent rise means we are going to be feeling plenty more pain at the gas pump. Air travel costs will also rise, and homeowners in the Northeast and Midwest who heat their homes with oil are facing a double-digit rise in keeping their homes warm.

Blame It on the Recovery

The good news is we're not looking at a return to the $4-a-gallon prices we saw in mid-2008 anytime soon. But with the global recovery in motion, energy demand has followed, especially in emerging markets that are recovering a lot faster than we are. One recent forecast said global demand for 2010 will be about 30 percent higher than originally thought and is expected to continue rising in 2011 and beyond. With OPEC not likely to increase production anytime soon, the upshot is a continuing climb in oil prices.

There's also the Bernanke factor as well: oil across the globe is priced in U.S. dollars, and any weakening in the value of the U.S. dollar relative to foreign currencies sends the price of oil higher. To the surprise of many, the dollar has held up better than anticipated as the Federal Reserve embarked on its second round of quantitative easing (QE2), but as the Federal Reserve Chairman told 60 Minutes this past weekend, the Fed will not rule out even more easing in the coming months. If that triggers dollar weakness, oil prices will climb even more.

Here are some tips on how to cope with the surge in energy prices:

1. Gas

Typically about 60 percent to 70 percent of the cost of a gallon of gas is tied to what's going on with the price of crude oil. So no surprise, the cost of a gallon of gas has already risen more than 15 percent this year, with about half the jump coming in just the past three months:

Source: Gasbuddy.com

Okay, enough with the perspective. The more pressing issue is that the Department of Energy expects gas prices to rise another 7.4 percent in 2011 to an average of $2.97 for a gallon of regular. And if oil prices do hit $110 to $120 a barrel in 2012, that could translate to a 20 percent or so rise in the price of a gallon of gas from its current level. To squeeze even better mileage out of your current cars, check out 9 Smart Ways to Save on Gas and Six Myths About Gas Mileage.
And if you're in the market for a new car, maybe it's time to think seriously about cars that deliver the highest fuel efficiency, including the new Chevy Volt and Nissan Leaf electric-only models. Unlike gas prices, the cost of residential electricity is not expected to budge much from its current level. The Energy Department expects a 1.3 percent rise in 2011.

2. Home Heating
If your home is heated with natural gas or propane, you're sitting pretty, as the cost of those fuel sources aren't expected to rise. But households that rely on home heating oil are going to feel the pinch of the run-up in crude prices. According to Department of Energy, home heating oil prices will be 10.4 percent higher this winter, and with a forecast for bone-rattling cold in some areas, we'll need to use more heat, pushing total household spending on heat this winter 12.6 percent higher. The regional breakdown for home heating oil this winter:

• Northeast: Heating oil price up 10 percent. Total spending on heat up 14.5 percent to an average of $2,225 per household.

• Midwest: Price up 13.5 percent. Total spending up 11.2 percent to an average of $1,630 per household.

• West: Price up 10 percent. Total spending up 8.6 percent to an average of $1,403 per household.

• South: Price up 10.4 percent, but the expectation for warmer weather will give southerners a price break, with a 3.3 percent decline in total spending to an average per household of $1,628

3. Air Travel
Higher crude oil prices will also impact the price at the jet-fuel pump. The Department of Energy forecasts a 10 percent rise in jet fuel prices in 2011 which it says could trigger a 5 percent or so rise in ticket prices. Let's just hope that's not another excuse to raise checked-bag fees as well. If you're planning a big get-away in 2011, booking sooner than later seems to be the best way to lock in your cost now ahead of rising energy prices.

Photo courtesy Flickr user paulswansen

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