TWIP Report Warns of Much Higher Gas Prices

by: Bill James

Life requires energy. Less affordable energy, less life.

The Energy Information Administration usually soft sells bad economic trends relative to petroleum prices. The Dec 22 This Week in Petroleum (TWIP) report was an exception:

Historically, retail gasoline prices in the United States have followed a seasonal pattern. Prices typically rise during the summer driving season and drop after Labor Day. Over the 2004 through 2007 period and in 2009 (2008 is excluded due to the rapid run-up and subsequent crash in crude oil prices over the course of that year), the national average price for a gallon of regular gasoline fell an average of 22 cents between Labor Day and the middle of December. However, 2010 has seen a reversal in this pattern; the national average price has risen by 30 cents per gallon since Labor Day, the largest increase over that period since EIA began publishing weekly retail gasoline price data in 1990. The $2.98 per gallon national average price of regular gasoline is the second highest on record for the third week of December, surpassed only by 2007 when the average price reached $3.00 per gallon.

This graph from the EIA illustrates how normally gasoline prices fall in the last quarter of the year (green). In 2010, they increased by about the amount they normally decrease by.
Change in gasoline price trends

click to enlarge

As indicated by the Joint Forces warning to US military commands, price increases will get much higher: "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day."

The International Energy Agency (US Treaty Member) in the 2010 World Energy Outlook reinforces the military warning, noting the economy depends on oil "fields yet to be found".

American families lost about $2,000 per year of disposable income between 2002 and 2006 as gas priced increased from $1.45 to $2.92. Foreclosures increased as more and more families were forced to choose between paying for their commute or their mortgage. Foreclosures exposed policy errors, collapsed the banking system and home values.

The following graph shows how gas prices affect Disposable Income (left), EIA graph on Disposable Income relative to energy prices (modified in top right, the EIA stopped updating the graph in 2004) and peak oil at 74 mbd in 2005 (bottom right). As a side note, these graphs were used in presentations to the then Senator Obama and McCain staffs in July 2008 about the risk to the housing market. Those staffs did not believe higher gas prices were a risk to the housing market. Sept 2008, Bear Stearns proved them wrong. Policy makers have still not adapted to the fact of Peak Oil.
Disposable Income and Energy

Investments that depend on consumer disposable income will likely suffer. Meredith Whitney's warning that 50 to 100 US cities will default on their municipal bonds in 2011 seems more likely as gas prices reduce disposable income. Less disposable income, less economic activity, lower tax revenues. The article Second Leg of Home Price Declines is Afoot notes the affects on home values.

Likely industries to benefit:

  • Energy speculation is likely to increase. Rationing risks complicate markets.
  • Railroads seem likely to do well as efficiency become critical.
  • Personal Rapid Transit (PRT), ultra-light computer controlled urban railroads. Like Internet companies before 1984, most companies in this industry.
  • Construction and engineering companies such as Balfour Beatty (BBY.L), and Parsons-Brickerhoff Division are organizing efforts to help build PRT.
  • Beacon Power (BCON), Capstone Turbine (NASDAQ:CPST) and others that supply industrial scale power storage systems in support of PRT deployments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.