Why Gas Won’t Get Cheaper

The May 9th issue of Time magazine had an interesting article on why it is that gas prices won’t be getting any cheaper (you can also read it online; subscription required). Nothing terribly new here, but there are some interesting statistics, as well as a bit of investment advice.

The bottom line is that, with demand booming, the available supplies just can’t keep pace. Oil consumption has increased by about a third over the past 20 years, and it’s expected to increase an additional 50% over the next 50 years. Yet oil production is projected to peak within the next 15-25 years. While the world isn’t on the brink of running out of oil (yet), the most easily accessible deposits have been depleted. Thus, it’s getting harder and more costly to extract it. While there’s been a good bit of talk about limited US refinery capacity being the root cause of high gas prices, commodities investor Jim Rogers argues that the greatest problem is the price of oil itself. In fact, gas prices have increase in lockstep with the price of crude.

So what’s driving the boom in demand? Aside from economic growth in the US, along with our affinity for gigantic automotive monstrosities, countries such as China and India are experiencing tremendous economic booms. And this growth has been accompanied by equally tremendous increases in oil usage. Elsewhere, Great Britain will soon transition from being a net exporter of oil to being a net importer. Bottom line: while worldwide oil production increased last year, demand increased even more rapidly.

What about alternative energy sources? Well, those can only help to the extent that they replace oil usage. Since electrical power plants are typically powered by coal or natural gas, things such as wind or nuclear power won’t help a bit. And while hybrid vehicles (or any other technology aimed at increasing fuel efficiency) might eventually help the situation, these cars are more costly to buy, and are not yet sufficiently popular to make a difference. According to David Wyss, chief economist at Standard and Poor’s, the magic number may be around $3/gallon, at which time such vehicles will likely gain much wider acceptance.

What effect will these high prices on the US economy? There’s been pretty dire predictions from some corners, including a recent book, The Long Emergency, in which the author argues that gas will soon become so expensive that most Americans won’t be able to afford it. Thus, America will have to reinvent itself, completely reworking its infrastructure, or risk falling apart. Despite these doomsday predictions, the US economy has managed to continue to grow overall despite dramatic increases in oil prices.

So how can you profit from all of this? Should you invest in oil-related companies? Actually, the article recommends investing in things such as retailers in comparatively oil rich areas, such as Texas, which should experience a boom as oil prices continue to creep upward.

If you’d like some additional background, as well as a historical perspective, you can visit the Time magazine archive of oil industry stories. As with the article referenced herein, a subscription is required.