$5.00 A Gallon Fantasy!
Well, it seemed it was going to be one of those days! Radio stations and TV stations were ringing my phone off the hook wanting to know if it was true! Could it be possible that we could be seeing $5 a gallon for gas by 2012? What set this firestorm of media outlets off all basically asking the same question was a prediction by former Shell Executive John Hofmeister who is predicting that not only will we see $5.00 a gallon gas, but at the same time they are predicting sort of an oil price Armageddon, or at the very least a return to shortages and gas lines like we had back in the 1970's.
While gas prices could rise to this historic level, the truth is that it probably won't. Of course, just by making that prediction Mr. Hofmeister more than likely got the attention he was looking for. You see Mr. Hofmeister is now a spokesman a political action group called, "Citizens for Affordable Energy." A group that according to their website exists, "To educate citizens and government officials about pragmatic, non-partisan affordable energy solutions, environmental protection, energy alternatives, efficiency, infrastructure, public policy, competitiveness, social cohesion, and quality of life." And if you are interested they do accept donations.
Of course, while their goal is a noble one and I agree with many of their big picture ideas (thank goodness we have another political action voice other then the wildly imaginative and often misleading anti-energy group Public Citizen program). I respect Mr. Hofmeister and agree with him on many issues, but in this case I have to believe that this doomsday prediction was an attempt to get attention for the serious energy problems facing this country as opposed to an accurate prediction of where the price of gas is going. There is nothing that will get your attention more than a prediction of outrageously high gas prices, which today happens to be $5.00 a gallon!
Let's look into Mr. Hofmeister prediction and try to see how much is real and how much is hype. One argument that Mr. Hofmeister makes is that the U.S. government is turning its back on domestic oil production. Yes, that is true, but at the same time oil is a global market place. In fact just today the Wall Street Journal reported that Western oil Companies, "For the first time in several years, large Western oil companies are leading the industry's charge, increasing their budgets faster than the state-run national oil companies that have dominated spending in recent year. From giants Saudi Aramco and Exxon Mobil Corp. to five-person wildcat outfits, the industry plans to spend nearly a half-trillion dollars next year to find and extract oil and natural gas, according to a new survey by investment bank Barclays Capital".
While this does mean that the industry is expecting decent prices, the increase in production should help ward off major areas of tightness in supply. Even for gas prices to reach $3.00 a gallon in December, it happened after an unlikely chain of events that is unlikely to be repeated in the future. First of all you had a crude price that got a major lift because of the Fed policy of QE2. There is not anyone that would tell you that oil prices would be above $90.00 a barrel without the Fed stepping in.
The Department of Energy says that rising crude oil prices have been the main driver behind increasing U.S. and global gasoline prices. Crude oil prices have been supported by strengthening global demand for products. Demand growth in 2010 has been broad-based, with strong non-OECD oil demand throughout the year, augmented by a pick-up in OECD consumption, particularly in the United States, as the year progressed. Based on monthly data through September, U.S. gasoline demand increased (year-over-year) for six consecutive months, the longest such stretch since 2007. Weekly data for October, November, and December indicate that trend is continuing.
Strengthening demand combined with a tightening U.S. supply picture (particularly on the East Coast) to further boost price pressures. Gasoline supply in the East Coast market is highly dependent on imports, and events in the weeks following Labor Day complicated the import picture. In October and November, a planned outage at Irving Oil's St. John refinery in Canada, a major supplier of gasoline to the United States, coupled with port and refinery strikes in France, limited the amount of gasoline available for import. These events, along with routine seasonal maintenance at several key domestic refineries, led to a sharp drop in inventories on the East Coast. In late August, gasoline inventories on the East Coast were in excess of their five-year average by over 11 million barrels; however, by the end of November, that excess inventory had been completely eroded, with inventory levels almost 3 million barrels under the five-year average.
The other factor is the impact on demand. While gasoline demand at the pump jumped 4.6 percent last week because of holiday travel, according to data in a MasterCard Inc. SpendingPulse report, we are likely to see a major drop shortly. With storms hurting travel and consumers conserving because of high price, slowing demand should help cap prices.
The other issue is spare production capacity. Currently, according to estimates, the world now, without any further investment, has a cushion of extra production capacity of close 5.5 to 6 million barrels of oil per day. It is not like we have a tightness of supply. While demand is expected to increase, so too will production. According to the EIA as reported by the Wall Street Journal, U.S. gasoline consumption was below levels seen in 2007 and increased U.S. September gasoline demand and characterized the resilience of U.S. gasoline use as, "a surprise in recent months."
Yet longer term the IEA also adjusted its medium-term forecast for U.S. gasoline consumption through 2015 to reduce the projected decline in gasoline use. One reason is an increase in the number of less-efficient light trucks in the U.S. in the wake of lower gasoline prices. The IEA also said that the demand outlook is quite different from a few years ago, when surging consumption helped push oil prices to close to $150 a barrel.
The agency projected global oil demand growth would likely moderate in 2011 amid "renewed structural decline" in developed economies and the moderation in the Chinese economy. In the U.S. we also have a problem that did not exist in the past and that is a current glut of refining capacity. In 2009 according to estimates, North America and Europe shut 1.05 million bpd of processing capacity last year, and closed close to 1.32 million bpd more this year.
According to numbers by the International Energy Agency estimates we could see as much as 6.0 million barrels a day of new conversion capacity that will be added by 2015, accounting for more than 41 percent of world crude distillation capacity. The IEA also says that Asia has added about 1.6 million barrels a day of capacity last year with 800,000 barrels a day in China and 600,000 barrels in India. They also expect capacity additions in the region could total 800,000 barrels a day each year in 2010 and 2011.
All of these reasons and more make it unlikely that we will see $5 a gallon gasoline in the future.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.