Tags: fifteen | dollar | gas | coming

Brace Yourself for Fifteen-Dollar Gas

Thursday, 05 Jun 2008 04:11 PM

Think that gas prices are high now?

Just wait until you’re paying $15 a gallon at the pump, cautions Weeden & Co. energy expert Charles T. Maxwell.

"We’re heading in that direction," says Maxwell.

Don't rush out into the street screaming just yet, though. "I think it will be a number of years before we get there."

Trading conspiracies aside, it really is all about supply and demand, Maxwell warns. And that picture isn't changing long term.

Governments have been way too slow, he says, to recognize and act on the problem.

"That’s the fundamental problem going on in the world today, and so many people don’t recognize it," Maxwell says.

It isn't really a drilling problem, he warns. We're drilling, but we're finding less and using more at the same time. "This has never been so before," he says.

Maxwell sees gas prices peaking between $4 and $4.50 this year, then dropping back to $3.50 to $4 and remaining at that level through 2009.

He says that present gas supplies are sufficient — and that at $4.50, gas is priced about right for $130 a barrel crude.

"We’re not running short of gas, but we are running short of crude," he says. "It’s not a serious problem because we’re about in balance now and will be for the next year to 18 months.

"But around 2010 to 2012, things will begin to go out of balance again and the problem hits hard."

Acknowledging that current prices are very high by any historical standards, Maxwell expects that by then they will begin to rise again, pushing back through $4 to $4.50 and entering the $6 to $7 range by 2012 or 2013.

Maxwell points out that in his 48 years in the business, the oil supply system has always had a cushion to fall back on in times of bad weather and political unrest.

"Suddenly, we’re without that cushion because of demand in the last four or five years, particularly from emerging economies, and there hasn’t been a compensating increase in new production brought on stream for a variety of reasons," he says.

Oil prices behave in quirky ways, Maxwell notes.

A long, slow, upward line in a diagram drawn over the next five years may make things appear smooth, but the fact is there’s already been a huge jump in the price of crude.

Energy analyst Kevin Book says that the current oil market is running at 96.5 percent of capacity.

"Do something to add capacity to the market and I think you’ll change some of the price dynamics," Book says.

"Fewer SUVs could spell lower demand by millions of barrels per day."

Book also notes that gas prices are subsidized in many emerging economies, notably China, which holds $1 trillion in U.S. reserves.

"Governments that have been subsidizing the price of oil have to look at this and make sure things don’t get out of hand," Book says.

"Growing populations and prosperity increase (subsidy) cost to governments, and once people become accustomed to more they don’t want to cut back."

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Think that gas prices are high now? Just wait until you’re paying $15 a gallon at the pump, cautions Weeden & Co. energy expert Charles T. Maxwell. "We’re heading in that direction," says Maxwell. Don't rush out into the street screaming just yet, though. "I think it will...
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2008-11-05
Thursday, 05 Jun 2008 04:11 PM
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