$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.