What are gas and diesel prices going to be in 3 or 4 years in the U.S.A... anyone who actually studied(s) it?

Question

What are gas and diesel prices going to be in 3 or 4 years in the U.S.A... anyone who actually studied(s) it?

My father owns a trucking company and has a 3 year contract coming up... we need to speculate what gas is going to be in 2012... I would like to do it without just saying "3 years ago it was 3 dollars cheaper". Anyone who watches the barrel prices and economy have more of an educated guess?

Thanks in advance

Answer 1

Jim,

If only I could definitively answer your question.  I'd be a billionaire if I could!  Prices are set on the global market and influenced by essentially 2 factors.  Risk is what determines how much profit an investor will expect to receive from their money.  Greater risk means a greater return is needed to cover potential losses.  Demand is the other factor and reflects how much a consumer is willing to pay for the available supply.

International relations such as Iran and Israel affect prices.  Every time Iran flexes its muscles and tests nuclear devices, the risk involved with oil increases and the price follows.  Every time an oil rig fails or some fringe group attacks a pipeline, risk increases.  

Katrina is an excellent example of how risk affects prices.  We were enjoying historically low prices on fuel, after adjusting for inflation prior to Katrina.  Katrina hit and prices spiked as the oil supply infrastructure reeled from the ensuing shutdown and restart.  Within a week, operations were nearly 80% restored from a virtual standstill.  Rigs were repaired and began producing ahead of schedule.  They were also better prepared to weather a similar weather condition in the future.  Prices receded quickly, but never reached pre-Katrina prices.  Why?  Because investors perceived a risk they hadn't accounted for prior to Katrina.  That 25 cent increase was fueld by the risk associated with the catastrophic shutdown of our nation's energy network.

What does the future hold?  That all depends on who's got your ear.  Goldman Sachs, one of the most highly respected investment banks in the world, predicts $200 or more per barrel within a year.  The Saudis and other oil industry experts feel this spike is due to overly speculative market manipulation and that the true cost of oil remains about $70-80 barrel.  They feel once the dollar stabilizes and the US economy has recovered from the current financial issues that oil will return to its "true" price.  Keep in mind that oil still costs about $50 a barrel to get out of the ground.  That has never changed.  What has changed is how the market perceives the value of that barrel of oil.

If I had to predict a future price and I don't feel comfortable that I know enough about the investment climate to consider myself an expert, I'd say we've seen the top of the spike and prices will normalize to $80-90 per barrel within 2 years.  Where will that leave fuel prices?  I'll predict gasoline lands up about $3/gallon and diesel settles at about $3.50/gallon.

This prediction is based on slightly improved political climates, consistent supply and increased refining capacity looming on the horizon.  There are a number of refiners planning major capacity expansions and these will take years to bring on line, but steady progress will help mitigate price volatility based on the refining sector.

If the new President makes some foreign policy mistakes and pisses off some of our global brethren, you can be assured prices will skyrocket.  If we get out of Iraq, convince Iran to stop nuclear testing, formulate and implement a national energy policy (instead of just hoping it will all work out), prices will reflect the reduced risk and we will once again enjoy "cheap gasoline".

Demand also plays into fuel costs.  We are not the only player in fuel anymore.  China, India and other developing nations are using petroleum to power their infrastructure development, reducing available supply for the US market.  This is why diesel is more expensive than gasoline now.  In addition to the Pan-Asian factor, Europe is consuming our diesel at an ever increasing rate.  The US refining network is set up to maximize gasoline production, with diesel being considered a "byproduct" for many years.  This is why houses were heated with oil, because #2 oil (same as diesel) was cheap and plentiful.  There were nowhere near the number of truck on the road that there are today.  Once deregulation hit in the 70's, trucking products became cheaper than railroading and trucks began to use more diesel.

In Europe, with gasoline more expensive than diesel and many homes heated with coal, diesel became the fuel of choice for vehicles.  It's higher fuel economy and ready availability made it ideal for powering Europe's vehicles.  Currently, 40% of European cars are diesel powered.  Refining in Europe was optimized for diesel, with gasoline being essentially, the "byproduct".  European gasoline was sold off to America.  With diesel increasing in value, it's more profitable for diesel to be produced in America and shipped to Europe.  This reduces available supply here, and prices rise to reflect the supply/demand curve.