Tuesday, September 16, 2008

Is Cheap Gas Coming Back?

Cheap gas is not coming back. The days of $0.87/gallon gasoline were based on $9/barrel oil in the late nineties. With oil currently hovering around $90/barrel and no improvements on refining or distributions efficiencies on the horizon, gas prices will continue to stay in the $2.50 to $3.50 given current US federal and state tax rates.

The implications for industry are clear. More consolidation will occur in airlines and transportation. Energy exploration and alternative fuels will continue to attract capital. The American consumer will continue to curtail energy consumption as SUV’s get traded in for hybrid vehicles.

I am all for free markets and do not believe that the government should set a floor on gas prices. If gas were to retreat to below $2/gallon and the Hummer again became the GM flagship product so be it. However the auto industry needs to be prepared for any scenario. It cannot ask for cheap Federal loans to re-tool and then continue to build gas guzzlers.

The larger factor for US consumers is the trade deficit created by purchasing foreign oil. The wildly fluctuating crude prices whipsaw an already fragile US economy. Flex fuel and hybrid technology can certainly dampen this volatility. The strongest contribution government can make to foreign oil dependence is improving public transportation. With strong development of compressed natural gas and electric public transportation, American’s will be able to respond more quickly to price hikes by curtailing demand. OPEC will have to carefully consider production changes with more consumer power to reduce demand.

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