Wither Gasoline?

 

 

"One man's meat is another man's poison..."

Two big news flashes from yesterday as it relates to gasoline or the oil it comes from. First, the price of regular in my home town just went below $1.90. Who would have thunk it? Second, the price of a barrel of crude dipped below $50. Again, who would have thunk it?

What does all this mean? First off, let us only address this from a consumer's perspective. I will use a very simple example with simple math. John has a new truck. It gets better mileage than the truck he just traded in. That being said, it is still a truck. John drives 15 miles to get to work, mostly through congested traffic. His mileage is at the worst in this type of driving. He gets only 15mpg, whereas on highway driving, he can get 20mpg.

When John bought his truck, gasoline as at its highest point - $4/gal. To drive to work and back, entailed John using 2 gallons of gasoline - a gallon each way. It cost him $8 a day. However, last week when the price of gas hit $2/gal, the cost of driving to and from work was $4/gal, thereby saving $4 a day, or $20 a week, or $80 a month.

For many families today, an extra $80 (net) in their pockets is a real plus up. So what is the down side? Well, the market tanked again yesterday on the news oil went under $50 a barrel. There is a point where it is not profitable to frac and pump oil shale out of the ground. That point is somewhere between $65 and $50 a barrel. The net result will be the market correcting itself. Up in the Bakken Fields layoffs are looming. Layoffs will ripple into industries which supply Bakken its tools and equipment. Equipment in the field is now being "cold stacked" and soon some of the wells will be capped. The big party in North Dakota might be getting ready for a recess and some sobriety.

In Russia, the news is worse. Oil is a very important export for Russia's economy. Some say it is also used as a nefarious tool to finance Russian expansion. In Iran, a similar story. Iran needs oil revenue not only to live on, but also to fund it's "agent state" status on terrorism.

So where will all this lead us? Plain and simple, this is a textbook example on economics. We are in an energy bubble. Enjoy it, as it will not last. Market forces will soon prevail. The demand for petroleum products (the biggest of course being gasoline), continues to grow worldwide. In particular in China and India. Soon oil will again find its normal level and life will go on. Gas will no longer be $2/gal, but it will probably never again see $4/gal. That is as long as the government does not mettle.

The world of petroleum has always had a boom or bust history. That will continue until the next big thing in energy comes along. I still believe the next big thing is right around the corner. Be it more cars capable of running on natural gas, better, cheaper and safer batteries for electric cars, or viable fuel cell technology. When that happens, the glory days of oil will be over. For good.

Well, I have to sign off for now. I need to run down to the local gas station and fill up my truck at $1.89.9. And that for this retiree, is a good thing!