As an investor with significant exposure to oil prices, I’m always worried about something like the financial panic of 2008 that might trigger a quick drop in the commodity. One thing I’m not overly worried about is the American public kicking its addiction to oil any time soon.
For years I’ve always gotten a big kick out of analysts on CNBC talking about how $2 then $3 and now $4 per gallon for gasoline would kill the demand for the product in the United States.
I’m Canadian and I spend quite a bit of time in the United States. I can’t see any difference in the motor vehicle travel between the two countries. In the United States, the roads are crowded with gas-guzzling trucks and SUVs despite their drivers having no need for such big vehicles. In Canada, I see the exact same enormous vehicles driven by the exact same suburban housewives. In both countries, the roads are crowded at rush hour in the morning and after work.
And that is a bit strange, considering that Canadians pay quite a bit more than Americans at the fuel pump. Last week AAA’s fuel gauge report showed that the average price per gallon in the United States was $3.59. In Canada we are at $5 per gallon in many parts of the country.
You would think that $5 per gallon would change your fuel consumption habits. It hasn’t. And $4 per gallon or even $5 per gallon in the United States isn’t going to change much, either. Sure, if the price of gasoline jumps from $3.50 to $5 in the span of six months, there will be some short-term reaction. But over the long run, Americans aren’t going to be willing to significantly stray from the personal freedom a car allows.
And if you think Canadians have it bad, consider some of these prices per gallon where citizens still drive cars on a regular basis (from AAA):
- Turkey: $9.63 per gallon
- Norway: $9.27 per gallon
- Greece: $8.50 per gallon
- Denmark: $8.42 per gallon
- Sweden: $8.18 per gallon
- United Kingdom: $8.17 per gallon
Despite what the talking heads on television try and tell us, gasoline consumption is just not all that sensitive to gasoline prices.
Researchers at the University of California recently released a paper showing that there has been a shift in the elasticity of gasoline demand. Here is their conclusion:
We conclude that the short-run price elasticity of gasoline demand is significantly more inelastic today than in previous decades. In the short-run, consumers appear significantly less responsive to gasoline price increases. We speculate about a number of possible explanations for this result in terms of shifts in land-use, social or vehicle characteristics during the past several decades.
The majority of people under 65 in North America know only a lifestyle that involves having access to the unlimited mobility a car provides. It is not a luxury for us, but rather a basic need. $4, $5, or $6 gasoline isn’t going to make that much of a difference.
I’m not aggressively buying any oil stocks right now, as I do expect temporary stock market and oil price blips to allow for better prices in the next couple of years. I do have significant exposure, though, so if oil simply stays high, my oil investments and portfolio should do fine. If I do get to load up again on a significant selloff, I expect to do better. One thing I plan to do is profit and not suffer from peak oil.
Here are some ideas I’ve provided through Seeking Alpha for anyone interested in some additional exposure to oil producers: Penn West (PWE); Petrobank (PBEGF.PK); EOG Resources (EOG).
Disclosure: I am long PBEGF.PK.
