January 6, 2011

$5 Gas is Coming... Eventually....

Lately I seem to be noticing several mentions of "$5 gas" coming in our future.   This is one of the topics that has been batted around the personal finance blogosphere a little bit in the past week or two.

One article on FoxNews discusses the topic :   Former Oil Exec Predicts $5 a gallon Gas by 2012 Energy Shortages by Decades end  In the article the former exec of Shell oil John Hofmeister predicts that gas will cost $5 "in two years" and that we'll see gas stations run out of gas by 2018 or 2020 due to supply/demand being out of whack.   It seems all this talk of $5 gas comes from what John Hofmeister has said.  

Here's a Youtube video from 3 years ago in 2007 where the same executive saying that there "is plenty of oil and [natural] gas out there".    But then he follows that with : "if we had public policy to support" getting it.   He talks about how the policy only allows for exploration of oil in 15% of the "outer continental shelf".  Now a few years later the same guy is scaring us all with predictions of $5 gasoline.   And sure enough the news article also talks about the topic of deep water drilling.  Basically what I'm seeing is oil executives telling us that $5 gas is coming and then using that as a reason to argue for more offshore drilling.   Maybe I'm just a little cynical about what oil executives tell me.   Coincidentally John Hofmeister also has a book Why We Hate the Oil Companies which I'm sure covers more of his views and details of how/why gas might hit $5 and other interesting insights on the industry.   I wonder if its coming out in paperback soon?    Now that I've been all cynical and raised doubts about the motivations of a oil exec. I should say that I really have no reason to doubt what John says.  As far as I know he's giving perfectly honest and accurate opinions about the future of oil given his experiences and now that he is not employed by Shell I have less reason to question his motives.  (other than maybe promoting his book, but ya can't blame a guy for that)  


In any case I think that $5 gas is coming sooner or later.   If we have gas at $3 today and it goes up 5% a year then it will be just about $5 around 10 years from now.    So $5 gas is pretty likely within a decade.   Could it hit $5 within 1-2 years?   Sure it could.   It was well over $4 just a couple years ago.   It really shouldn't surprise anyone that gas might hit $5.   But you know what it could also drop to $2 a gallon or lower.    Just in case you have a short memory here's a graph from Gasbuddy.com showing gas over the past few years and note how it dropped from over $4 to under $2 in less than 6 months back in 2008.

Predictions of $5 gas are not new.   $5 gas by Labor day was written 2.5 years ago.     In 2005 they thought that hurricane Rita might cause gas to hit $5.  In some places it wasn't very hard to 'predict' $5 gas back in 2007 because people were being charged $5 a gallon.   Of course that was for premium gas and only at one over priced station as far as I can tell.   I forget did anyone say if we're talking about regular or premium and did they explicitly say national average price?   I'm sure they are just talking national averages for regular gas. Maybe.

Back in 1998 the Economist published the article The Next Shock? which predicted "We may be heading for $5" ... oh wait, oops they were talking about the price of a barrel of oil.   Back then oil had fallen to just over $10 a barrel and the experts were predicting how it could go even lower.  One of those experts was from Shell : "The chairman of Royal Dutch/Shell, Mark Moody-Stuart, three months ago unveiled a five-year plan that assumed a price of $14 a barrel."    They weren't just predicting it they were making plans for it.  But Mark wasn't very close.   Oil quickly shot up and doubled within a couple years and didn't go under $20 in any time during that 5 year period.  But I'm sure if they keep making guesses they'll eventually get it right.   A broken clock is right at least twice a day.

$5 gas will come sooner or later.  When that will happen is anyone's guess.

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