Oil Break $115 Per Barrel
Oil just broke through $115 per barrel today. While this may come as a shock to many , I’ve been preparing for it for the past 2 years. All the signs of an oil shortage have been visible in the media, but most people have either been ignoring it, been in denial or been too focused on what Paris Hilton or Brittany Spears have been up to!
China and India together have a third of the world’s 6.66 billion people. If 10% of these 2.2 Billion people start buying cars, that’s 220 million new cars on the planet ready to start guzzling more gasoline. I think thats the current number of cars in the US, so effectively the demand on oil is set to double over the next few years. And along with Tata Motors new $2,500 car, you can be sure that eventually atleast 20% or more of India’s and China’s population will be driving cars instead of cycles or mopeds that give 247 miles/gallon. That 247 number is not an exaggeration. Owners of Suburbans should refrain from crying right now.
Based on the growing prosperity in just these two countries, the demand for the world’s resources is growing at a furious pace. Unfortunately, oil is a key component of prosperity and the global supply of it is somewhat stagnant. Despite a few new oil fields being found here and there, new reserves are not keeping up with the depletion. According to one report, all the oil in Alaska would last the US for only 6 months.
If you think that gas prices are high at over $3.50 per gallon (I just paid $3.95 for mid-grade for my wife’s Acura TSX), wait until summer. There are reports that the refineries are absorbing the cost of high oil prices right now (and some of them have hedging contracts in place to mitigate this high price), but within a few months they’ll be passing this burden on to the consumers. Oil prices at the pump could very well hit $5 and if this trend continues, it could hit $8/gallon.
In the UK, petrol (that’s what the rest of the world calls gas) costs about 1 pound per litre, which equates to $7.50-8.00 per gallon. Now you Suburban owners can cry now if you like. Or you can start investing in oil related investments like Canroys and oil drilling programs.
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April 17th, 2008 at 4:21 am
If you ask me, I say gas is too cheap. I hope it does hit $7.50 - $8.00 a gallon so that there will be economic incentive for alternative fuels. The rhetoric of the President and the impulsive policies of the administration are hardly enough incentive for companies to invest in the development and distribution of alternative fuels. Although the administration believes that more ethanol in gasoline is a good idea, it will have a minimal effect on total petroleum consumption and will result in higher prices due to the high demand of ethanol. The amount of energy required to process such fuels is high, and of course the source of that energy is petroleum. The net effect is a relatively small reduction in the consumption of oil and even higher gas prices. Ultimately, requiring more ethanol in gasoline could actually lead to a reduction in consumption due to the higher price of gas, but not because it is a better alternative fuel. However, I believe it is better to allow the rising price of oil to bring alternative products to market rather than attempting to force new products onto consumers.
April 18th, 2008 at 6:38 am
I agree that in the short-term oil prices will continue to climb, but I’m cautious enough to not be putting all of my eggs in one basket.
Speaking specifically about reserves (oil in the ground that we know about), there are roughly 40 years of oil reserves world-wide. The thing that people tend to forget is that 40 years ago, there still was only *40 years* of oil reserves. This has been the case since oil was first discovered. Obviously China & India will play a role in increasing demand, but ultimately supply will keep up. Our worst-case supply scenario is that we’ll start converting our massive coal reserves into diesel.
Simply put, the price of oil is highly affected by public perception. Make money while you can, but be prepared for a “bursting bubble”.
Cheers,
Brad
April 18th, 2008 at 8:09 am
I really hope gas becomes $10 bucks. Then, the Idiot in Office, might finally push for alternative fuel, or at least public transportation.
I am in Belgium for a year, and the price per liter here is around 1.50 Euros, or about $9.6 per gallon, and let me tell you something - nobody cares!!! People are driving small cars that would be laughed at in any American city, or using the perfect and cheap public transport.
I had to travel a lot last week and rented a car - a very nice and comfortable, mid-sized Citroen (it would be considered small in the US). I drove 1200 kilometers, or 750 miles on one tank of gas, less then 15 gallons.
Who’s smarter now:)
April 18th, 2008 at 8:37 am
Great post. Increased demand from China and India coupled with the fact that so much crude is being imported from highly volatile areas (think Venezuela, Middle East, Africa, even Putin controls the majority of Russian petro, etc.) and it seems that $4 - $5 gas is here to stay. No surprise from a macro economic perspective here.
Possible short-term remedies and outcomes, off the top of my head:
1) Forcing oil companies to invest in infrastructure and refinery capacities. This will cause inventories to rise, prices to fall, but we may hit peak oil sooner rather than later.
2) Develop sustainable alternative energy sources to power automobiles (no, sorry.. corn-based ethanol is a sham) Allow for foreign companies to make footprints in the US.
3) Let the current market boom, bust or bubble and deal with the consequences
April 20th, 2008 at 9:20 am
[…] days later it spiked to $3.54 a gallon. Living Off Dividends discusses how he prepared for when Oil Breaks $115 Per Barrel. Mopeds are starting to look attractive at 247 miles per gallon […]
May 7th, 2008 at 2:35 pm
I really hope that gas doesn’t hit $8 a gallon. This is going to kill our economy and destroy the lives of the working class. $8 a gallon gas won’t hurt Bush and his big-oil cronies in any way. They are all insanely wealthy already and well-equiped to handle any economic downturn no matter how severe. What we need is a President who isn’t in bed with big oil and committed to making a real push towards renewable fuel sources.
May 7th, 2008 at 3:20 pm
Rarely do I see solutions to gas price increases that go beyond cars getting better mileage. But even with better cars, most cars less than fifteen years old will still be on the road. And they will be owned by people least able to pay the higher fuel prices. This won’t work. Working people won’t be able to afford fuel for the cars they can afford to buy. Bush likes to look outside of the US for threats, but this coming pinch is as much or more a threat to national security than most terrorism. At some point, solutions must begin to address how our entire transportation and economic systems work, or how they will work at $10 a gallon. I have ben waiting for Republicans to figure this out for thirty years. They haven’t yet, but I am hopeful.
May 13th, 2008 at 5:41 am
In areas that have light rail ridership is off the charts. Bus riders are only up slightly. Clearly we need a major investment in light rail for the 100 most populous cities. Expand the lines out to the collar counties, and even the ex-burbs.
Ethanol is part of the solution. Don’t fall prey to the well-financed (by those who want to keep oil in control) campaign against ethanol. The number one reason corn is expensive is due to the price of oil, which is used in every aspect of corn production. America can meet food and ethanol demand. Do some research. Type in big oil vs ethanol and learn the truth. Requiring 10% blend reduces gas consumption, keeps jobs in America, and eliminates dangerous MTBE with a cleaner additive.
Electric cars and hybrids are another piece. Over the next few years they will become more prevalant. 60-80 MPG is not far away. Electric consumption rates will jump, so immediate investment in electricity generation is needed. Nuclear and wind power must be ramped up. Some are pushing for a meter to be attached to electric cars so that those who own them will pay a “premium” for electricity. This is another “oil company” scare tactic. Do the research.
I could go on and on. The main thing is that there are dozens of new things hitting the market to help this situation. The sky is not falling. We can win this thing if we get the media blitz paid for by oil interests from distorting the truth.
May 18th, 2008 at 12:46 pm
[…] DIGG_URL==’string’?DIGG_URL:window.location.href); document.write(”"); } )() Living off Dividends:If you think that gas prices are high at over $3.50 per gallon (I just paid $3.95 for mid-grade for […]