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$4.00 is Still Cheap Gas

Written By Nick Hodge

Posted May 31, 2011

I’m headed to Myrtle Beach on Thursday.

Thirteen of us are going down there to mourn the plight of one. He’ll be getting married in two weeks.

There will be booze and special dances aplenty… and I haven’t heard a single person bemoan those expenses we’re destined to incur.

Instead, I’ve heard concern over the cost to make the 475-mile trip down there from Baltimore.

I figured it a good time to do some price comparisons, as I’ve done in the past on things like gas prices and retail electricity rates.

Cut and Dry

When a few guys on the e-mail chain started suggesting we fly down, I knew I had to step in with a bit of common sense.

It took about 30 seconds to learn flights from Philadelphia (many of us live in Northeastern Maryland, making both Philadelphia and Baltimore airports convenient) cost $356 and from Baltimore cost $524. Both flights had one stop and durations of at least five hours — not including traveling to the airport, parking, security, baggage claim, and any delays.

Let’s call it a generous $400 per person; $5,200 for thirteen of us.

What about the driving alternative?

Three cars making the round trip would cover 2,850 miles. Even at 15 miles per gallon, fuel use would come out to around 190 gallons, costing about $760 total — or $59 per person.

I don’t know about you, but I’ll take $59 and the comfort of a private car over $400, a layover, and a coach seat any day…

But there’s a broader point to be made here.

We Ain’t the Only Country

Even at $4.00, I consider gas to be cheap.

And spare me the “How could you say such a thing?” comments, please. I don’t enjoy it; I just know enough to know it’s only going to get more expensive.

You know how much they’re paying at the pump in Istanbul, Turkey, right now? $9.63 per gallon.

In Oslo, Norway? $9.27 per gallon.

In London? $8.17 per gallon.

That’s a far cry from the $3.79 I paid over the long weekend.

Of 170 countries surveyed this month, there are 147 paying more for gas than we are in the United States. By that measure, your glass should be 86% full when it comes to your opinion of gas prices.

Simple Supply and Demand

If you’ve been reading this letter for any length of time (or paid attention in 9th grade economics), you know the main reason behind high oil and gas prices.

Here’s a refresher course that applies to any good in a competitive market, in case you’re behind:

  1. If demand increases and supply remains unchanged, then it leads to higher equilibrium price and quantity.

  2. If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and quantity.

  3. If supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity.

  4. If supply decreases and demand remains unchanged, then it leads to higher price and lower quantity.

From the very first gas station up to today, we’ve been dealing with the very first law of supply and demand: Increases in demand will lead to higher price and higher supply. That’s expected to continue for the next 40 years.

You’ve seen this play out. How much did gas cost when you first got your license?

How much did it cost in 1980? In 1990?

Though they’ve been on the rise for decades, gas prices have largely avoided criticism because they’ve done so without sharp upward swings. But anytime there’s a big jump in a short amount of time, people start complaining.

Oil supply has always walked a fine line with demand. Trillions have been spent to drill new wells, to perfect advanced drilling techniques, and to look under seas and mountains for additional supply.

We’ve fought the good fight. We’ve found every last easy drop we can find. And now, after 150 years of drilling, baby, drilling, supply is barely able to keep up.

Like a junky would rob a convenient store to afford his next fix, we’re now going after tar sands, shale, and deep-sea oil to keep pace.

Those sources will only last so long.

And every time the market thinks oil demand is in danger of being greater than supply… prices will rise.

This isn’t speculation; this is a law of economics, like gravity is to physics.


Two things are certain to happen as this plays out:

1. All remaining oil will be valued at a premium.

We’re already seeing that now, with the market paying $102 per barrel for new supply.

Expect that to increase.

JP Morgan, Goldman Sachs, and Morgan Stanley all said this week oil will hit $120 this year.

That’ll mean a hefty profit for the small company sitting on 1.87 billion barrels of the last remaining easy oil on earth — as well as for the companies that can extract it from thousands of miles below the earth’s crust.

2. We’ll try to curb demand.

When increasing supply proves futile, we’ll get serious about reducing demand.

To some extent, this has begun already…

Both Obama and Bush made “reducing our dependence on foreign oil” a key talking point. The rollout of hybrid and electric vehicles is about to reach a tipping point. And governments the world over are offering citizens incentives to reduce energy consumption by doing things like buying those hybrids, weatherizing their homes, or installing solar panels.

Make no mistake; this isn’t some feel-good liberal campaign…

It’s our last hope at keeping energy prices at a manageable level before they spiral out of control.

Change Your Perspective

Next time you feel like complaining about high gas prices, just do what I do: Change your perspective.

Remember someone in Europe is paying more than twice what you are. (This works for taxes, too.)

Remember you can use the situation to your advantage by investing appropriately.

And of course, no matter what you pay at the pump this week, remember that it’s only going to climb higher.

Call it like you see it,

Nick Hodge

Nick Hodge
Editor, Energy and Capital

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