$5 Gas Prices Coming to a Pump Near You

by Jeff Reeves | January 14, 2011 12:02 am

$5 Gas Prices Coming to a Pump Near You

Crude oil prices are rising steadily, up about +22% since a may “low” of around $77 a barrel, and gasoline prices have jumped in lockstep. As a result, energy stock picks[1] seem to be on everyone’s radar right now. There are a lot of reasons behind an increase in crude oil prices per barrel as well as gas costs at the pump, however one thing appears certain – the $2 gas we saw at the beginning of 2009 is a distant memory, and the $3 gas of today is here to stay.

As much as it will pain commuters to hear it, it’s very likely the days of $4 gasoline prices and even $5 gas lie ahead. A look at expert forecasts and recent news about crude oil prices indicate the recent run-up in prices is not a short-lived phenomenon.

Here are seven reasons to expect expensive gas for the rest of 2011:

Big Oil Needs Expensive Gas to Survive: According to industry experts, the “easy” oil in the Middle East and Africa can be pumped for as little as $5 a barrel from simple surface well. Costs vary greatly for unconventional projects such as deepwater drilling and tar sands, but can easily be $40 a barrel or higher for tough to access supplies of oil. With fierce global competiton and  state-run monopolies in Venezuela and China squeezing out Western energy giants, the bottom line is that cheap oil – and subsequently cheap gasoline – just doesn’t work out on the balance sheets of big oil. Call me a conspiracy theorist, but considering that Exxon Mobil (NYSE: XOM[2]), Chevron (NYSE: CVX[3]), BP plc (NYSE: BP[4]), ConocoPhillips (NYSE: COP[5]) and Royal Dutch Shell (NYSE: RDS.A[6]) have a collective market value well over $1 trillion, it’s hard to imagine all that financial clout simply sitting by and letting oil slump back to $50 or $60 bucks a barrel where high-tech, high-cost extraction leaves them little or no profit margin.

OPEC Wants Expensive Oil: The Organization of the Petroleum Exporting Countries, or OPEC, has made it clear that $100 oil isn’t a sign of alarm but rather a decent equilibrium. The group has gone on the record saying oil prices above $100 a barrel are no reason for an emergency session. “If oil prices increase to $100 or more, it is not worrying and does not justify holding an extraordinary meeting by OPEC,” Iranian oil minister Masoud Mirkazemi was quoted as saying by the ministry’s news agency Shana. Is not worrying to whom, Mr. Mirkazemi? I think motorists and crude-dependent industries would have a different point of view.

Supply Problems Becoming Common: Just this week, we learned the Trans Alaska Pipeline network is suffering continuous pumping and leaking problems, raising concerns about tightening global oil supply. According to reports, owners BP plc (NYSE: BP[4]), ConocoPhillips (NYSE: COP[5]) and Exxon Mobil (NYSE: XOM[2]) at one point slashed output by 95% this week. That adds up to 600,000 barrels a day lost – and despite reports of progress, the pipeline is yet to return to full capacity as of this writing. At the same time, U.S. commercial oil supplies fell 1.2% to 335.3 million barrels last week. And as commodity expert George Kleinman wrote[7] recently, the EIA Energy Stocks Report shows a steady downward spiral in the amount of crude oil currently on hand. Coupled with news from OPEC countries like Iran and Kuwait will keep output constant, we are up against a supply shortfall in the months ahead.

Former Big Oil Exec Says So: John Hofmeister, retired president of Shell Oil, set a target of $5 a gallon by the time 2012 rolls around according to a recent interview[8] with energy trade publication Platts Energy Week[9]. Specifically, Hofmeister said you can expect $4 a gallon this year and to $5 a gallon in the election year 2012. Given the man’s pedigree and experience with Big Oil.

Green Energy Icon Says So: If you think it’s just scare tactics cooked up by big oil, consider that separately, T. Boone Pickens — the man behind a recent legislative push to add more wind energy and switch fleet vehicles and other large trucks away from imported oil and instead domestically produced natural gas — has predicted $120 a barrel oil in 2010. In an interview with the National Journal[10] last week, Pickens made his call on oil – which equates to a 20-25% increase over current crude prices. Add that much to gas and we’re pushing $4 a gallon. Granted, Pickens also has a financial interest in expensive gas since he is invested in alternative energy. But his predictions are worth noting – especially since Pickens’ early business career was as a wealthy oil tycoon himself.

A Healthier Economy Means More Demand: The biggest problem with $4 gas in 2008 was that it coincided with the beginnings of a recession in the U.S. as the mortgage crisis took hold. As the American economy shut down, we saw oil peak at a whopping $147.27 before flopping to $40 a barrel in early 2009. The double edged sword of economic recovery this time around is that sustained spending will add up to sustained oil prices. The bottom won’t be as likely to drop out since the economy is in much better share in the first quarter of 2011 (and beyond) than it was in the first quarter of 2009 after the mayhem of the financial crisis and the failure of GM, AIG, Lehman and others. There will of course be a tipping point, but judging from the stock market’s surge alongside oil in the last several months, we are not near that point yet.

Inflation Continues to Rear Ugly Head: Another weak, and another warning of runaway inflation in the works. Leading central bankers warned again Monday of resurgent inflation in fast-growing emerging economies and warned rising food and energy prices could spread to Europe and North America. Euro zone inflation rose above central bank targets in December, and UK inflation unexpectedly hit a 6-month high. If the steady drumbeat of inflation news continues we can expect the recent surge of crude oil prices (15% in 3 months) to continue.

Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter at http://twitter.com/JeffReevesIP.[11]

Endnotes:
  1. stock picks: http://investorplace.com/stock-picks
  2. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  3. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  4. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  5. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  6. RDS.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.A
  7. George Kleinman wrote: http://investorplace.com/27913/crude-oil-prices-pipeline-commodity/
  8. a recent interview: http://money.cnn.com/2010/12/27/markets/oil_commodities/index.htm
  9. Platts Energy Week: http://www.platts.com/weblog/oilblog/2010/12/30/john_hofmeister.html
  10. National Journal: http://www.nationaljournal.com/energy/pickens-says-oil-could-reach-120-per-barrel-20110105
  11. http://twitter.com/JeffReevesIP.: http://twitter.com/JeffReevesIP

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