Friday, as higher prices fail to change driving habits, and demand keeps growing.

It's the third straight year that pump prices have exceeded the benchmark, and some analysts are forecasting $4 a gallon by the end of the summer. 

The increase follows 12 weeks of falling inventories that are largely the result of rising demand and refineries closed for maintenance and unexpected repairs. 

As drivers prepare for the summer vacation season, the nation's gas stockpiles are at the lowest level since October 2005, when Gulf Coast refineries were closed after hurricanes Katrina and Rita. 

This year, demand is climbing along with prices. Deliveries of gasoline from refineries are up 1.9 percent this year from a year earlier, according to the Energy Department. . . .  

The national average for regular gasoline at the pump rose 2.1 cents overnight to $3.01 a gallon Friday, according to AAA. The record is $3.06 on Sept. 5, 2005.

This year, companies struggling to retool refineries to meet new environmental standards, have faced longer, more extensive maintenance and serious outages, draining gasoline inventories ahead of peak summer demand.

This year's dramatic increase in oil prices and the decline in the dollar aren’t two unfolding crises for the U.S. economy but two sides of a single blockbuster problem. 

And unless you understand the vicious cycle of higher oil prices leading to higher trade deficits leading to a weaker dollar leading to higher oil prices, you won’t see the changes coming in your everyday life until they hit you like a truck doing 60. 

Let me try to explain the cycle and its consequences for the everyday economy where we live our lives. 

Let’s start with higher oil prices. In the beginning, they were a result of several factors: 

Higher demand for oil from the fast-growing economies of China and India.

Supply disruptions in Iraq, Nigeria, Venezuela, Russia and the U.S. Gulf Coast.

Fear that the global oil industry was finding less and less new oil.

A terrorism/war premium.

Buying by traders speculating that oil prices would rise. 

Under the pressure of all those circumstances, the price of a barrel of oil in the U.S. climbed to a high near $55 a barrel this year. That’s a huge increase, considering that the average benchmark price of a barrel was just $21.84 in 2001, and it pushed the cost of U.S. oil and gas imports higher and higher. In October, the Labor Department reported, the $12.3 billion cost of petroleum imports was up a huge 68% from October 2003.  

Pricier oil equals higher trade deficits 

Because we import so much of the oil we use, the huge jump in petroleum prices has added to the growing U.S. trade deficit in goods and services with the rest of the world. That deficit -- the difference between the cost of what we import and what we export --climbed to $51.6 billion in September 2004. Contrast that with the $29.6 billion monthly U.S. trade deficit in January 2002, before the price of oil spiked. 

That deficit can’t be blamed wholly on the rising price of oil or on U.S. oil imports in general, but the petroleum-related part of the deficit is now so large that it just about guarantees rising oil prices in the future. And that’s because oil is priced in U.S. dollars, and the fall of the value of the dollar has led to a decline in the value of the dollars that the Organization of Petroleum Exporting Countries collects for its oil.  

Think about being the executive of a Saudi oil company that wants to buy equipment from Frances Schlumberger Limited (SLB, news, msgs). Thanks to the fall in the dollar against the euro, that equipment costs 10% more in dollars on Dec. 8, 2004, than it did a year earlier. And if you go back further to the dollars high against the euro in 2002, that oil equipment priced in euros now costs 57% more than it did in 2002. (The euro zone countries represent the biggest source of OPEC imports, so the exchange rate between U.S. dollars and euros is critical to OPEC finances.) 

No wonder OPEC is so intent on raising its target price to $30, a huge increase from the current target of $22 to $28 a barrel, as it was expected to do at its meeting today, Dec. 10. 

Welcome to the vicious cycle 

And this is where the vicious cycle kicks in. Every dollar increase in the price of a barrel of imported oil increases the size of the U.S. trade deficit, which puts more pressure on the value of the U.S. dollar, which leads to a weaker dollar, which makes OPEC countries want to raise the dollar-denominated price of a barrel of oil to make up for the dollar’s fall, and so on. 

A vicious cycle, like its self-reinforcing good counterpart the virtuous cycle, doesn’t reverse overnight. Ending this one will require a drop in U.S. energy imports sufficient to decrease the U.S. energy bill, thereby shrinking the U.S. trade deficit and decreasing the supply of dollars sloshing around OPEC. (A little fiscal discipline on the part of the U.S. government, a revaluation of the Chinese yuan and a pickup in global growth so that overseas consumers could buy more cheap U.S. exports wouldn’t hurt, either.) . . .  

Expect high and rising energy costs for a long time. Breaking this vicious cycle could take a decade -- longer if our government continues to ignore the problem, and much longer if the experts who project that we’ve reached the point of diminishing returns in new oil and gas discoveries are right.

Employers have turned more cautious in their hiring, adding just 88,000 jobs in April and a modest 129,000 per month on average so far this year. That's down from last year, when job gains averaged 189,000 per month.

Financial markets showed little reaction to the weak numbers, since the jobless rate remains low by historical standards. Also, many analysts, including those at the Federal Reserve, expect unemployment to creep to a level closer to 5 percent this year. That would fit with moderate economic growth, not a sharper downturn.

The unemployment rate would have been higher in April if not for the fact that hundreds of thousands of Americans dropped out of the labor force, either leaving their jobs or quitting the job search.

the size of the labor force also shrank, shaving two-tenths off the share of the population participating in the job market and thus keeping the unemployment rate from rising more quickly.

After a slight downward revision to earlier gains this year, payrolls have been expanding at a monthly average of 118,000 over the past three months. When compared to the 195,000 monthly average in the prior three months, payroll growth has decelerated by 77,000 jobs per month.  If this trend persists, unemployment will rise as job seekers begin to outnumber job openings. . . .  

How worried should we be about the weakness in today's employment report?  As suggested above, if these trends in payroll growth and employment rates worsen, the majority of households will find themselves increasingly squeezed.  Along with higher prices, many of these consumers are facing higher levels of mortgage debt, and with home prices falling, refinancing is less of a source of ready cash now than in recent years.  True, the stock market has been quite frothy of late, but these returns are concentrated among those at the top of the wealth scale.  Most households depend on their paychecks not their portfolios.  Without considerably stronger job growth, the threat of a recession will begin to loom large.

[W]hat’s actually occurring in this economy is the globalization of assets and wealth. That is to say, because the value of American labor is falling so precipitously, (due to the utilization of cheap foreign labor around the world), the value of the assets held by them is falling in direct correlation with their declining wages. It must.

Here’s why: 

A worker formerly employed in a lost economic sector, (manufacturing for example), earned between $50 - 60,000 annually. That job gets outsourced. Now that worker takes a job paying $20 – $25,000 annually. All the tax cuts, cheap foreign goods, and low paying jobs being created by President Bush and globalization aren’t going to restore this worker’s former standard of living. 

Presently, someone trying to pay down a debt service based on their former “un-globalized” salary, and prior level of affluence, just can’t do it. The fact is, now that America’s been globalized, that worker – along with all others of the same economic rank – can’t afford the assets they’ve purchased and are trying to hold on to. 

Just as wages within their economic sector are being deflated; so must the value of their assets be deflated. This has to occur so that new members of their socioeconomic group, those just entering America’s global workforce, can afford to participate; including those living and working here illegally. 

What we’re seeing now is just the beginning of a global revaluation; a downward harmonization of American worker’s livelihoods with the livelihoods of the world’s other working people. Furthermore, this state of affairs isn’t going to end any time soon; not until the descending worth (wages and assets) of America’s working classes, meets the ascending worth (wages and assets) of the labor they compete with globally. 

Therein lays the rub. Most of the rest of the world’s labor works for nothing, or almost nothing, and holds no assets. Truth be told, the only country whose entire economy has prospered due to Globalization is communist China; where free market capitalism doesn’t exist [officially] and where every societal need is [supposedly] provided for by the government.

As Ross Perot so aptly phrased it during his debate with Vice President Gore in 1993, we’re in: “a race to the bottom”.