High Gasoline Prices bring Challenges and Opportunities
By
Timothy Lutts, Chief Investment Strategist and Editor of
Cabot Stock of the Month ReportFrom Cabot Wealth Advisory 6/5/08
Sign up for free Cabot Wealth Advisory e-newsletterThe high price of gasoline is one of the biggest concerns of Americans today. Everyone wants to know whether the price will decline, stay up here at $4 a gallon, or climb higher.
Well, at Cabot, our very successful growth stock investing system works because we DON'T try to predict the future. Instead, we simply observe trends and invest on the expectation that they will continue.
So for me, the simplest attitude is to say, The trend is up; it'll probably continue. But I have some of my own thoughts on the issue, so today I'm going to do a little speculating on the future price of gasoline, and the possible effects of those prices. A lot of what I predict will likely be wrong, but if I can get you thinking about things that MIGHT happen, I think you'll be able to prepare for change, and position your portfolio to benefit from it.
For starters the "obvious" causes of the high price of gasoline are growing demand from China and India combined with an inability of the petroleum industry to increase production at an equivalent rate.
Another part of the equation, impossible to measure, is the effect of speculators, who amplify the trend by buying futures, which have the effect of making fuel appear scarce in the future as well. What they do is generally legal, though an investigation now being conducted by the Commodity Futures Trading Commission may find some illegal activity. Time will tell.
These trends, of course, can continue, and they have the potential to drive gasoline prices much higher. But I'm betting that in the short-term, gasoline prices have reached a plateau. I think that public perception of the problem is now at a fever pitch, as illustrated by the primacy of the issue in consumers' minds, and the recent stories about the plummeting sales of trucks and SUVs. And I think that the charts, as well, show a need for a cooling-off period.
One clear result of the recent high prices has been a marked increase in the use of public transit by those with access to it, and a general reduction in driving activity by others. Small cars like the Honda Fit, which gets 34 miles to a gallon on the highway, are selling like hotcakes. The actual effect of these changes in consumer behavior is unknown, but the perception that demand is falling is in the air, and that perception is likely to influence gasoline prices in the short run.
In the long run, however, I think the price of gasoline will continue higher. Yes, new drilling will open up new fields, but only because those fields would have been money-losers with gasoline at $3 a gallon or below. The producers drilling new wells today are counting on continued high prices.
And then there's the matter of Peak Oil, which I examined back in April (see the
issue in our online archives). The basic theory says that someday, the earth being in effect a finite reservoir, the amount of oil that we are able to extract per day will begin to decrease.
That fact is unarguable. The only question concerns the timing. What I've read leads me to believe we are nearly there. Yet the concept of Peak Oil remains alien to most Americans. In fact, I recently asked a number of smart people if they were aware of the concept of Peak Oil. Every single one said no.
So maybe I'm wrong. But I've learned that problems come from where they're least expected, and because no one is talking about Peak Oil, despite some serious independent research that supports it, I'm worried.
So, my bet is that after a pause, even a retreat, oil prices will continue to rise. And the ramifications will be huge.
People will drive even less. People will fly less too, as airlines increase their prices to account for the cost of fuel. The skies will become less crowded. Gas-guzzling trucks and SUVs will slowly fade from our highways. More fuel-efficient but slower transportation systems will gain favor, including railroads and ships. Toyota Priuses, Mini Coopers and Smart Cars will rule the road.
Heating the house will bring an increasing burden, escalating flight from the northern latitudes. McMansions will house multiple families. And houses in general will shrink.
On the bright side, however, the demand for alternative energy sources will foster wonderful new inventions that will, in time, fill much of the demand for energy. Solar power and wind power are the most attractive contenders today, and I've recommended stocks in these sectors previously. I also think we'll see breakthroughs in battery technology, which will be terrific for hybrid and plug-in cars.
But you can't fly an airplane on solar power or wind power or battery power, so the airline industry, more than any other, appears to be the one that will have to cope with major cost increases.
Now, some analysts have projected that a lack of energy will bring massive failure of our electric grid, with attendant catastrophes, including the loss of power to water-pumping and sewer-pumping stations.
But I'm an optimist. I believe that the ingenuity of mankind, stimulated by the need for new power, will deliver a solution as it always has. The transition will no doubt be disruptive, but it will include new opportunities for people who are good adapters, and one of my jobs is to help identify those profit-making opportunities.
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