Aug 29 2006
Gas Prices, Peak Oil and the Energy Problem
In a positive affirmation to the inflation crowd, Chrysler announced Monday that it expects gas prices to remain in the $3 to $4 range for the rest of the decade, and that it’s business model is changing to accommodate this new reality. The reality of high gas prices appears to also be taking a toll on consumer confidence, which plunged in August — although consumers also have the slumping housing market and job anxiety to credit for their loss in confidence.
But as for gas prices, here’s our list of a few reasons why consumers and investors ought to continue planning on prices in the $3 to $ 4 range.
Peak Oil
For those who don’t understand the Peak Oil discussion, it should not be cast aside as a half-cocked belief that the world is running out of petroleum energy resources. Rather, it is a compelling argument that the sun is setting on the easy availability of the purest quality petroleum based energy reserves. From an economic standpoint the world has benefited dramatically by having to expend very little energy in order to extract high quality oil from the earth, which can then be refined for other purposes with very little energy input. This translated into gasoline prices that were for a nearly century cheaper than drinking water. Peak oil theory, however, suggests that oil production has recently peaked, and that as the low hanging fruit slowly vanishes over the next decades, sources harder to extract or refine will have to be tapped. These resources will require higher energy and input costs, resulting in progressively higher costs to consumers. You can read more about the pros and cons of the Peak Oil Theory here.
Money Supply and Credit Inflation
When you expand the units of currency in circulation, eventually prices will adjust to the expansion. However, it should be understood that price inflation does not hit all goods and services equally. Instead, it hits hardest those goods and services highest in demand. Energy is one of those first-order, high-demand goods. The U.S. dollar is the common currency used for all global oil transactions. As such, the massive expansion in U.S. dollar supply over the last thirty years, and especially in the last ten, is finally starting to take its toll on prices. Given the massive problems with the U.S. balance sheet (both personal and government), we expect this inflation problem to only grow worse. [Read more about money supply inflation here at Vigilant Investor.]
Environmentalism
We all want a clean environment, but it comes at a cost. In the U.S. it is nearly impossible to tap new regions for energy extraction. Building a refinery is so riddled with environmental and NIMBY (not in my back yard) rules and lawsuits that there has not been a new refinery built in over thirty years. The infrastructure is old, and at full capacity, making it ever more costly to maintain.
As well, due to geographic choices made decades ago, U.S. refinery capacity is very susceptible to hurricane damage, as we saw first-hand during the 2005 season. Two hurricanes hit the Gulf coast, and as a consequence, the U.S. was incapable of refining its own oil and was forced to purchase gasoline from abroad. Unless capacity is allowed to expand more easily, expect future problems
As well, rules governing different gas formulations for different times of the year and for different regions of the U.S. creates shortages which cannot be remedied by the rest of the countries gas supplies. This also leads to price spikes at seasonal turnover periods. Also, recent requirements to add Ethanol to gas has caused prices to increase.
Short of an economic meltdown, don’t expect environmental rules to lessen.
Geo Political War Premium
The U.S. lead and backed wars in the Middle East have created supply problems for some time. They have also resulted in a speculative war-premium being placed on the price of oil. Will this problem clear up any time soon? See our recent post on the Mid East quagmire.
This is the popular explanation for the price spike in gasoline. It should, however, be considered in the context of the prior three issues.
Were we facing just one of the above issues, consumers would not have such a problem going forward. However, as Chrysler seems to acknowledge, don’t expect these situations to change for the better any time soon.
As such, Vigilant Investors should consider what this means to their portfolios as well as for their future energy budgets.
