Why Gas Prices Will Break Record Highs in America

Apparently, gasoline prices are on the rise again in America…which has my childhood friend in Louisiana, Jim, carping and whining. 

Now, I need to note that I do not really feel any gas price pain because I live in Prague, where I have quick and immediate access to trams and subways that ferry me anywhere I want to go in the city, and for the bargain basement price of about $160 per year. 

That’s far less than the average monthly new-car payment of $717 in the U.S., or $563 for a used car…both of which just blow my mind. I mean, that’s an insane outlay when real median personal income in America is just over $37,500 ($3,125 per month), according to the Federal Reserve’s St. Louis branch. 

But this is not about a dispatch about car payments.  

It’s a story about gasoline prices, by way of oil prices. 

For many months now, I’ve been telling you the story of underinvestment in the oil patch. Back in March of last year, in that month’s issue of our Global Intelligence Letter, I wrote about something known as the Red Queen hypothesis—a reference to a quote in Lewis Carroll’s Through the Looking-Glass, in which the Red Queen tells Alice, “It takes all the running you can do, to keep in the same place.”  

Well, the oil industry hasn’t been running as fast as necessary.  

It’s falling behind. 

By that, I mean that the exploration-and-production (E&P) side of the oil business has not been spending as much as it needs to spend to explore for and produce new oil reserves. There’s a reason for that… Well, two reasons: 

1. COVID shut down the global economy, as you might recall. 

Oil and gasoline demand plunged. Oversupply built up, and E&P companies were loath to invest billions to poke exploratory holes in the ground when they had nowhere to put the oil. 

2. Western governments, in their rush to suck up to the enviro lobby, are aggressively pushing a green-energy future. 

Yes, that green day is coming, and yes, that day is necessary. I’m totally on board with green energy. But Western governments are going about this in the dumbest way. 

They’re imposing overly stringent regulations that take effect across the remainder of this decade to phase out this, that, and the other thing. Yet, there’s simply no economically feasible path toward building out all the infrastructure necessary to flip the switch from fossil fuels to green-tech so quickly. 

But the effort has, rightly, caused hang-wringing inside E&P boardrooms. 

Why invest billions of dollars in the hunt for new oil and gas reserves when the government is doing all it can to devalue those reserves before they’re even found?  

Here’s the dirty little not-so-secret in all of this: Western governments are 100% screwed. 

They’re fomenting what I labeled in that March issue of Global Intelligence the “Last Great Oil Boom.”  

Every single oilfield in the world is decaying, even as you read this paragraph. 

Every barrel of oil pulled from each oilfield brings that field one barrel closer to depletion. And yet there’s not enough exploratory drilling happening to replenish the depletion. (By the way, the stock I recommended in that March issue, a drilling company, is already up more than 40%, testament to what’s happening right now as energy companies increasingly realize they’ve got to do something to replace at least some of the depleting fields.) 

No doubt you see the conundrum here. 

Demand for oil is not falling off, despite Western government dictates. Yet supply is dwindling by the second, and too few new fields are being discovered. 

At some point, it’s a “boom goes the dynamite” moment, when the world suddenly realizes, “Holy moly! We’re short on oil, and this promised green revolution is still decades away from anything meaningful!” 

And at that moment, oil prices will go absolutely bonkers—a technical term for oil prices at $250 per barrel or higher. 

Sure, that sounds crazy. But others are now getting on board with this same worry. 

Just this week, Goldman Sachs put out a report noting that the lack of spending on finding new production is going to run headlong into ever-increasing demand.  

Goldman’s oil analyst calculates that by May, just a few months from now, oil markets should flip into a deficit situation, meaning supply won’t meet demand and that the gap will quickly consume the otherwise-thin spare production capacity that does exist in the world. (China could exacerbate the problem if its economy fully rebounds from COVID lockdowns.) 

Goldman expects we will be back above $100 per barrel oil by 2024. Right now, Brent Crude, the global oil-price benchmark sits just above $81, while West Texas Intermediate, the U.S. benchmark, sits on $75. 

A run past $100 is going to see gasoline prices push above $5 per gallon. Simple math really: Each 42-gallon barrel of oil produces roughly 20 gallons of unleaded gasoline…$100 for the barrel, divided by 20 gallons of yield gives us $5 per gallon just to recoup the cost of the barrel of oil. 

Of course, there are profit margins and taxes to add on top of that, and not all oil a refiner produces is bought at exactly $100. But you get the drift of what’s going to happen. 

And what’s going to happen is this: My friend Jim is gonna inundate me with angry texts this summer when gasoline, now $3.45 on a national basis, is back in the $5 range. 

Whoa-doggy is he gonna be livid when the Last Great Oil Boom takes hold this decade.