Wednesday, July 9, 2008

News & Observer Article

My hometown newspaper (Raleigh News & Observer) asked me to write a column for this past Sunday's edition, so I decided to touch on oil and gas prices (they were also kind enough to mention this blog and include an excerpt). Keep in mind, I was limited to 500 words so this is hardly a comprehensive examination of the topic. In case you missed it:

Everyone's talking about soaring energy prices these days. My oil industry contacts have informed me that you’ll soon have to hand over your first-born child to cover the cost of a fill-up. Fortunately, my wife and I are soon-to-be parents. With gas prices reaching record levels, we now find ourselves anxiously hoping for septuplets.

To address the energy crisis, Congress has been hard at work trying to pass bills that would allow us to sue OPEC and deter “financial speculators” while the President is threatening to attack Iran – the world’s fifth largest oil exporter. I don’t know whether to laugh or cry.

None of these steps will do anything to significantly lower oil and gas prices. Rather than suing OPEC and threatening Iran, it might make more sense for us to be making nice with large oil exporting countries – tell them how pretty their deserts are, send them a nice fruit basket, maybe even stop constantly threatening to bomb them.

The fact of the matter is that oil prices have been increasing primarily because of rising demand in a supply-constrained world. Demand in the developing world (think China) has been growing strongly for years. Global supply, however, has not. The recent discovery off the coast of Brazil is the first major oil find in over 30 years. Add to this the normal depletion of mature oil fields, below-normal inventory levels, inadequate refining capacity, and the increasing chance of an attack on Iran, and it’s not surprising that my neighbor’s gas tank is always near empty or that I can’t get the aftertaste of gasoline out of my mouth.

Oil prices are likely to correct at some point, especially if the global economy slows sufficiently, but the intermediate-term outlook for oil remains solid. Ultimately, high oil prices themselves will lead to the end of oil’s dominance. An oil price over $100 per barrel is the best thing that has ever happened for alternative energy development. Prices at these levels provide a powerful profit incentive to develop efficient and economic energy alternatives, and thousands of alternative energy companies have been created in recent years as a result. Although most of these companies will eventually fail (think internet), the resulting advances in alternative energy technology will likely be tremendous.

In the meantime, what can you do about high gas prices? There are the obvious suggestions: get a car with better mileage, drive less, carpool, or quit your job and start a home-based adult daycare for ex-Bear Stearns employees. Another option is to hedge the rising cost of energy by owning a mix of energy-related stocks and/or ETFs. If oil and gasoline prices keep trending higher, the gain in these securities may help offset the pain at the pump. If you’re lucky, you may even be able to hang on to your second-born.