Higher Energy Prices Are Here to Stay

05/15/2008 12:00 am EST


Peter Way

Founder and CIO, Peter Way Associates

Peter Way, editor of Block Traders’ Oil & Gold Monitor, says that savvy traders expect crude oil prices to go higher—and the lack of alternatives means they may stay there.

Regardless of whether oil stocks duplicate their most recent January decline, it seems clear that there are better places to place your energy investment capital in coming weeks and months. Or is the bloom off all energy stocks, and energy will now get less expensive?

If you drive a vehicle that won’t fit in ordinary parking spaces or limited overhead structures, you may hope so, but the hedgers from around the world are behaving as though many $100+ fill-ups are in your future. They have ratcheted their upper expectations another +$10 or more skyward from [a month ago]. Now $130 possibilities seem likely, and $140+ may be.

We have pointed out that trade commitments tend to drive the traditional semi-annual futures, while more flexible and shorter-term influences are controlling the other months. These differences spell opportunity.

As an ordinary individual investor, the opportunity presented by this continuing expectation of higher crude prices is just what we have been asserting all along. There is a growing world-wide imbalance between energy demand and supply. Crude oil is the low-cost, transportable source of energy, and most of its accessible sources are known or already developed.

For the next few years alternative energy sources in meaningful size will not be available, and all of the presently available alternatives are more costly when properly accounted for. The current ethanol political hornswoggle is a perfect example of refusing to accept this reality, and illustrates the far-reaching effects on food of energy access, and its conversion, worldwide.

Since supply and demand will be brought into balance and supply is already straining at its limits, demand will get curtailed, most likely by rising prices. My last fill-up came at $4.15 a gallon, and it’s not going to stop there.

As a retired competitive bicyclist, I am an enthusiast, so don’t get me wrong. So, where is demand reduction going to come from? With an average usage per year of 1,375 gallons of crude (or its products) by every one of the 303 million men, women, infants, paraplegics, and others in this country, a $5+ [per-gallon] pump visit is bound to reorient some priorities. It’s already starting, but so far balance is nowhere in sight.

That implies until meaningful alternative energy sources are available, the pressures on existing sources will get intense. Since few major oil producers have been able to find sufficient new reserves anywhere in the world to keep up with the growing demand from their customers, they will be forced to do it by acquisition.

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