Wednesday, February 27, 2008

FJ Prediction: $4/gallon gas by Memorial Day


Please note, I am not giving any investment advice. You need to do your own due diligence in regards to investing.

We’ve got a perfect storm brewing in the energy markets right now. Oil has recently hit, and for the first time closed at, over $100/barrel this past week. On top of that, the springtime has many refineries switching from winter blends to summer blends. Alongside both of these issues is the fact that Memorial Day kicks off the summer driving season when gasoline consumption tends to peak.

All three of these trends lead me to believe we are going to see a major uptick in the price of a gallon of gas starting now. Here in Santa Fe we’ve already seen gas jump up by about $0.50/gallon in the past month, to about $3.09/gallon (and I have seen some stations at $3.19 for regular unleaded).

I know that oil also was hovering around $100/barrel oil in November and December of last year. For some reason we didn’t see a big bump in the price of a gallon of gas. Here in Santa Fe, prices remained in the $2.60 - $2.80/gallon range during that time. I’m not sure why prices stayed so low (although my conspiracy theorist has lots of ideas about government manipulation to keep prices down over the critical Holiday shopping season).

Regardless, we didn’t face the other two issues back at the end of last year. Refineries are already stretched to their limit trying to keep up with our energy consumption. When they start to switch over in the next few months, expect major increases in the price of gas. Last year, even though oil was in the $60/barrel range, gas prices jumped over $3/gallon because of the refinery bottleneck.

I’d be interested in finding out if they’ve been shipping extra number fours (for the signs) to local gas stations in anticipation of the $4/gallon being breached. For the record, I also thought this was going to happen last year, but that never materialized. Nevertheless, everything seems much more likely this summer.

The only thing that could change this prediction is a sudden and dramatic slowing of the economy in the next 3 months. Even though this is a possibility, and the economy is slowing right now, I doubt this is going to have much of an impact on oil prices. There is a real bull market happening in energy right now and I expect that to continue in the short term.

However, longer term I’m positive that prices will be falling rapidly starting in Winter, 2008. I think by that time you are going to see real recessionary indicators on both the American and world economy. If worldwide oil consumption drops by only 10%, that could result in a 50% drop in the price of oil (back to $50/barrel and probably under $2/gallon gas). I hate calling this good news because it only happens if the recession is stronger and deeper than anyone thinks right now.

I will follow up with this on Memorial Day to see if my prediction comes through.

Sorry I've been so sporadic with my posts. This month has been crazy, but I've got lots of stuff to talk about going forward. I'm going to try to post some more real soon!

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