Will we see $3 gasoline before we see $5?

A: “Who knows?” and “It doesn’t really matter.” Much higher gasoline prices that are sustained for a long, long time are now inevitable.

The fundamentals in the oil market are that we are in the beginning stages of peak oil. Supply can no longer keep up with demand, which has kept soaring even in the face of record prices. The U.S. Energy Information Administration has the surprising statistics:

Preliminary data indicates that global consumption rose by roughly 500,000 barrels per day (bbl/d) during the first half of 2008 compared with year-earlier levels, as a 1.3-million bbl/d rise in consumption outside of the Organization for Economic Cooperation and Development (OECD) was partially countered by an 800,000 bbl/d drop in U.S. consumption compared with year-earlier levels…. Total world oil consumption is expected to grow by a little over 1 million bbl/d during the second half of 2008 and by almost 1 million bbl/d in 2009 compared with year-earlier levels.

That’s right, even after “the largest half-year consumption decline in volume terms in the last 26 years” in this country, global demand continues to grow 1 million bbl/d each year. Why?

Over the next year and a half, lower OECD consumption is expected to be more than offset by continued non-OECD consumption growth, led by China, the Middle East, Latin America, and India.

Yes, speculation overextends every move in market price — but why shouldn’t people speculate that oil prices will be much higher in the future? That seems like a very solid bet. And yes, a rising dollar can temporarily help lower prices — but we are headed for a $10 trillion cumulative trade deficit just in oil between now and 2020. So which way do you think the dollar is headed long-term?

Ultimately only much, much greater demand destruction can stop the inexorable rise of oil prices. And that obviously requires much higher prices than what we’ve seen in the first half of this year!

Global consumption is now about 85 million barrels a day. Until the last few years, the United States was the major contributor to rising oil demand. From 1995 to 2004, China’s annual imports grew by 2.8 million barrels a day. Ours grew 3.9 million. Since then, growth has come mostly from China, India, the Middle East countries themselves, and other developing countries that subsidize their fuel.

The world just can’t deal with oil demand rising one million barrels a day or more year after year. In January, Jeroen van der Veer, chief executive officer of Royal Dutch/Shell, e-mailed his staff that the world will peak in conventional oil and gas within the decade. He wrote: “Shell estimates that after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand.” It used to be unheard of for oil executives to talk about limits to oil production. Now it happens all the time.