Wednesday, October 05, 2005

gas is going up(side down)

The Chevron Typhon Before

The Chevron Typhon After

A friend recently emailed to ask if I thought we would see a rise in the price of gasoline as a result of Hurricane Rita. In a word, Yes. I would have said $4/gallon for regular unleaded post-Rita if you had asked me before the storm hit. It hasn’t risen to that level yet but I will wager that we will see an increase up into the neighborhood of $3.50/gal in the short term. I also think there’s a strong possibility we’ll see $4 +/gal for gasoline and lines by Christmas. There will be a delay in the understanding of the situation as oil production facilities and refineries are inspected for damages, make repairs and bring everything back up online. Previously produced fuel will mask the problem at first. That and our government and its lap dog, mass media, will hold back on the truth of the situation so as not to scare us. The very fact that former oilman and current president George W. Bush was able to utter the words “conserve energy” should give you a good idea of the severity of the situation. That’s a far cry from “the American way of life is not negotiable.”

There will also be a lot of talk about how this problem is short-term. I liken the situation to driving around on bald tires. We just had a blow out. Will we buy a new set or just patch up the hole and get back on the road? Tires, by the way, are made of oil.

Lately people have also been asking me about price gouging by oil and gas producers and distributors. Insert interesting argument about the revered law of supply and demand here. Greedy convenience store owners aside, I don't think the bigger boys are interested in taking short term profits above normal margins. In fact I think oil and gas companies will be willing to take it on the chin to a certain extent in order to stave off that sort of criticism. I think though that they do see hurricane-related shortages as a way to raise the public's threshold for higher gas prices. In the past if Exxon or Shell or any of the other oil companies increased prices they would have taken quite a bit of heat. Just look at the protests going on in Indonesia. Now they can point the finger at natural disasters. They understand that the adult American pubic currently has the attention span of a 4 year old and will get used to higher gas prices fairly quickly as long as news of Demi Moore’s latest wedding keeps pouring in. Think, we are no longer talking about when gas will drop back below $2/gallon. We’re checking websites to see who has it for less than $3.

But let’s stop for a moment and examine the effect of a price hike of $1 a gallon for gasoline on someone like me. I drive approximately 350 miles per week. My 1993 Nissan Sentra gets approximately 35 miles/gallon (wanna trade Excursion boy?). That means I use approximately 10 gallons of gas per week. At $2/gallon I spend $20 per week on fuel. Increase the price by $1 a gallon and I’m spending $30 per week. That’s an increase of only $10 per week. That just means I can’t go to Starbucks every morning. It doesn’t mean I’m canceling Christmas. Even if you look at those people who drive cars 1/3 as efficient as mine, say 12 miles per gallon. They would still only be paying $30 additional dollars per week to drive. That ain’t the end off the world either. It’s just sticker shock. But back to Christmas…

More important than the price of gasoline during the last week of september 2005, I would tell you to keep an eye on 2 coming events: the natural gas shortage (and subsequent price increases as we head into winter) AND the holiday spending numbers. Natural gas shortages (the Unites States’ recovery of the stuff was in decline before the storm by the way) will cost people either alot of money or their lives this winter. This will curb spending which will sucker punch the economy as well as scare the poo out of everyone. It’s one thing to cancel your Christmas shopping plans because of sticker shock, it's quite another not to be able to keep your children from freezing to death. Also a drop in consumer confidence (already happening) coupled with a rise in the price of everything made of oil or transported by oil (in other words everything) will cause people to be able to afford considerably less than this time last year. I’m not hoping for it but I think a recession beginning this winter is a pretty safe bet. I’ll go out on a limb- the Dow closes under 8,000 by New Year’s Day 2006.

With that happy prediction out of the way my advice: Do some serious thinking about where your heat comes from. Do the same concerning your local electrical service. Ask family and friends to do some similar thinking. Walk through your safety preparedness- food, water, solar-powered battery chargers, etc. Consider taking some cash out of the market or even out of the bank for emergencies sake. Perhaps purchase some gold or other precious metals as investments during down times. It’s important not to have to think about these things in the dark. Planning for them won't make them happen but it will mean you're better prepared if they do.


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Horatio said...

Nuline, You inevitably going to have nay-sayers out there, especially ones who are in serious denial about all of this-- defensive, ignorant, and/or arrogant jackasses who don't have that 4 minute gnat attention span to spare. However, that aside, I'm finally coming to grips with the reality of some of this myself. And you're right, semper paratus for all of us or we'll go under. Keep the predictions coming...regardless of the reality of them. You make some good points. Ciao.

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Anonymous said...

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