Smart Investing


March 2, 2012


$5 gas is possible, not probable

When I turned on my computer last week and began my morning check of what's going on in the world, I noticed an article on Yahoo Finance titled “Eight Reasons Gas Will Hit $5.00 this Year.”

What first caught my eye was the word “will,” which is a strong word, and the second was “eight reasons.” So I took the bait and read the full article. What I discovered did not surprise me: someone trying to get in on the media blitz about rising gas prices.

I did submit to some local media a segment titled “Are rising oil prices a real concern or a greedy scam?” I think that, since I wasn’t on the side of saying that gas prices will be going higher, it would not be a “hot” story. You will get the details here, whether the mainstream media picks it up or not.

Of the eight reasons given, some could have been combined since they are working off of the same thought. For example reason one and two discuss Iran and how Iran could close the Strait of Hormuz. I think Iran is one reason, and it is possible that they could close the 30-mile-wide passage through which 20 percent of the world's oil supplies are channeled.

It is no secret that the U.S. Navy is sitting there, ready to take action if need be. Iran knows this and is also aware that support of the allies or the U.N. would not take long to achieve. The article does not address that the United States only gets about 6 percent of its daily supply through the Strait of Hormuz. Maybe that was too much of a positive. While closing the Strait of Hormuz is possible, it is not probable. Reason two plays off of reason one, and discusses more on interruption of supply from Iran.

Reason three is that refiners are likely to raise prices. It is discussed here that oil refiners in the United States refine the higher cost Brent Crude rather than WTI (West Texas Intermediate) which is a lower-cost crude. It also mentions that refiners lost money in November and December of last year, and public companies cannot lose money for very long before they have to increase prices on gasoline.

We could say this is partly true. Refiners will have a difficult time when oil increases rapidly, and their margins will shrink. In our portfolio we own one of the largest, if not the largest, refiners in the world. Based on GAAP accounting the company did have a profit in the fourth quarter. As oil per barrel increases, the refiners will have to pass along that increase to consumers, but it would not be any more than the increase one would see in oil.

Reason number four is other Geopolitical risks concerning Nigeria and Venezuela, the 14th and the 11th largest producers of oil in the world, respectively. These two countries do export to the United States about 13 percent of our daily oil, and while I will admit these two countries are volatile, it is for different reasons. It would be unlikely for both countries and Iran to have problems all at the same time.

I had to laugh at reason number five, which discussed a recession in the European Union. The article suggested the possibility that, should leaders fix the economic problems, demand will increase since there would not be a recession, or at least wouldn't be as bad as expected. This statement is also true because if the EU is doing better, demand for gasoline will increase. However, the article emphasizes how bad things are on one side, but then says how good things could be on the other side. You can’t have it both ways. Be optimistic or be pessimistic, but you can’t be both.

Reason six and seven could also be combined into one reason, discussing the improving U.S. economy and how, with summer driving coming up, more Americans will be driving.

This also is true, but leads into reason number eight: supply risks.

This reason concerns the lack of excess capacity around the world, from Canada to Brazil to the North Sea. Again, this is possible but not probable. We have heard this many times before, but surprise, surprise, new technology finds new oil.

Here in the United States there is a big glut of oil in the middle of the counrty. People in Denver are only paying around $3.12 per gallon. The problem is that we are having difficulty getting this oil out to the coasts. The great thing about capitalism is when there is a void, someone or some company will fill that void for a profit. The same will happen here today as well.

We have already begun on that path as the U.S. dependence on foreign oil has been falling since 2007 and will continue to fall as companies and entrepreneurs find ways to fill the void.

While it is possible gas will hit $5 per gallon I don’t think it is probable. Many negatives would have to become reality along with many positives becoming reality all at the same time, and I just don’t think that will happen all at once.

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


March 2, 2012