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By Keith Fitz-Gerald
Money Morning/The Money Map Report
The U.S. Energy Department said earlier this week that it expects average monthly gasoline prices to peak at $3.60 a gallon this spring, since the high prices will serve to curb demand.
For investors who are tired of feeling like they've been mugged every time they fill up at the corner gas station, this forecast had to nurture a feeling of relief – as well as a belief that pump prices will finally start to decline.
That may well happen in the short term (although even the Energy Department report said that before prices level off there could be interim price spikes that will take pump prices up over the $4 a gallon level).
But for the long haul, after looking at this prediction, we can't think of a more powerful indicator – or surefire sign – that prices at the gas pump are headed higher … much higher.
First and foremost, governments have had an unbelievable record of making bad decisions using bad data. And that record goes back centuries. Unfortunately, it's the taxpayer who usually ends up dealing with the consequences of these ill-advised government "predictions" after these civil-servant prognostications lead to such maladies as inflationary spirals, taxation cycles, recessions, monetary-policy miscues.
Why should this time be any different?
History suggests it won't be.
When it Doesn't Compute
Economic forecasters – especially those employed by the government – have a spectacular history of getting little, if anything, right. Not only that, but according to a study conducted by Societe Generale (OTC: SCGLY), financial analysts lag reality badly and change their minds only when there is irrefutable proof they are wrong.
William A. Sherdan, author of the book, "The Fortune Sellers: The Big Business of Buying and Selling Predictions," notes that "economic forecasters have routinely failed to foresee turning points in the economy, the coming of major recessions and the starts of recoveries."
As if that weren't bad enough, University of Chicago Professor Victor Zarnowitz – a leading global expert on business cycles and forecast evaluation – specifically analyzed the U.S. Federal Reserve, the President's Council on Economic Advisors and the Congressional Budget Office to assess the error rates associated with their predictions. His work found that 46 of 48 predictions made by this bunch missed major economic turning points including – most notably, the severe recession beginning in 1974.
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Don't expect their marksmanship to get better anytime soon, either. Data we're familiar with suggests that conventional governmental forecasting is actually getting worse over time – not better.
Which makes us all the more suspicious of the $3.60 per gallon price point, particularly since it flies in the face of nearly everything we here at Money Morning know about global gasoline demand – which is accelerating dramatically even as long-term supplies are slowly being squeezed.
We'd love to say that's a surprise, but there's evidence of more government meddling here, too.
A Streetcar Named … Greed
Today, few investors remember the Great American Streetcar Scandal, but it helped set the fuel pinch we're feeling today in motion decades ago. In case you're not familiar with it, the scandal was a joint effort between General Motors Corp. (GM), Firestone Tire, Standard Oil Corp. and Phillips Petroleum (COP) to acquire streetcar systems nationwide … after which this anti-streetcar syndicate ripped out the municipal trolley systems in order to force the mass adoption of the automobile. This all took place between 1936 and 1950.
Long story short, GM was fined a whopping $5,000 and its executives charged $1 each for conspiracy, but the damage was done. Throw in the Interstate Highway System – which came into existence at about the same time, not coincidentally – and one can easily imagine the links between higher demand and bad decision making, even if only in retrospect.
Which brings us back to the present day…
Gasoline prices are indirectly tied to oil and, as such, the $3.60 line the government drew in the sand stands directly in the face of everything we know about "peak oil" and global demand.
Originally proposed by Shell Oil geophysicist M. King Hubbert in the 1950s, the concept of peak oil refers to the point in time when the maximum rate of petroleum production is reached, after which this production rate endures an irreversible decline.
Originally, it was a highly controversial theory. But in an era where we're burning reserves four times faster than they're being replaced by new discoveries, it's increasingly being accepted as a reality. The sharper experts are no longer asking "if" we're going to run out of oil; now they're trying to predict "when."
It's certainly a vexing question, and we don't pretend to know the answer.
But we do know this: It's likely to be sooner than the world thinks, if for no other reason than global demand is accelerating at a record pace at a time when worldwide inventories are generally declining.
That's why investors can expect more days like Wednesday, when the disclosure that U.S. oil inventories were "lower than expected" torpedoed U.S. stock prices and sent oil futures soaring to a new intraday record of $112.21 a barrel.
The latest Energy Information Administration data suggests that world wide consumption will increase 37% by 2030, which puts demand at staggering 118 million barrels a day. For some perspective: Daily oil consumption in 2006 was 86 million barrels.
Not surprisingly, the lion's share of new demand is coming from the developing world, with China and India leading the way. China, which imports 55% of its oil, is on track to double consumption within 10 years, while India is expected to triple its oil usage in the same period to more than 5 million barrels a day.
Where this gets really interesting is that any number of factors that would reduce supply don't appear to be included in any of the generally accepted equations. For instance:
- The growth rates in both China and India alone are fast enough and the countries large enough that they could potentially negate any savings we see in this country from higher prices.
- Oil-exporting countries are becoming increasingly likely to "hold back" oil from the international export markets, opting to keep it at home literally to fuel domestic growth.
- Several major oil suppliers – most notably Saudi Arabia – may not be accurately reporting their reserve capacity.
Which brings us full circle.
Why I Believe Oil Will Reach $187 a Barrel
I've been projecting energy prices for well over a decade. And I've always made sure to include all the potential catalysts in my forecasts. That's why my projections have been on the mark.
Back in early 2002, when oil was trading at less than $20 a barrel, I conservatively predicted that oil prices would reach $100 a barrel within 10 years. As we now know, it happened in a shorter period than that.
Where do we go from here?
Late last year, when oil was trading in the range of $90 a barrel, I first publicly predicted that crude would trade as high as $187 a barrel in the next three years. In the middle of March, just days after I reiterated that prediction and provided some potential related investment opportunities in an edition of Money Morning, Wall Street giant Goldman Sachs Group Inc. (GS) issued a report predicting crude oil prices would reach $175 in the next few years.
Real pricing changes and the altered behavior that flows out of such stressful stretches can only take place when prices are high and when shortages become apparent. Without the benefit of all the information uncovered by such a volatile environment, forecasting can be a fool's game.
As I've demonstrated, whenever I've made price projections, I've always made sure to factor in as many variables as possible. But it's clear to me that the Energy Department did not do the same.
Therefore, as much as we'd love to believe that gasoline prices will stop their incredible ascent at $3.60 a gallon this spring, we can't. Not only does the government's price point seem to be little more than another guess in a long line of baseless predictions, it's even contradicted by the saga that's unfolding on the global economic stage.
Absent the introduction of proven alternatives to gasoline, we're entering an era in which a pump price of $3.60 a gallon is going to be looked back on as a bargain.
And while it's going to be a painful period, investors who view this as an opportunity may well find ways to take the sting out of escalating energy prices. Check out these Money Morning investment research reports:
- Three Ways to Play Money Morning's Prediction That Oil Prices Will Reach $187 a Barrel.
- Outlook 2008: How to Profit When Oil Bubbles Up Above the $100 Level.
- Outlook 2008: Alternative Energy Companies Will Power "Green" Profits in the New Year.
News and Related Story Links:
- Fox Business News:
Oil closes at new record above $110 a barrel: Crude futures earlier hit new intraday high of $112.21 as inventories fall.
- Money Morning Financial Analysis:
Three Ways to Play Money Morning's Prediction That Oil Prices Will Reach $187 a Barrel.
- Money Morning Economic Forecasting Series:
Outlook 2008: How to Profit When Oil Bubbles Up Above the $100 Level.
- Money Morning News Analysis:
Goldman Sachs Follows Money Morning Prediction That Oil Prices Could Approach $200 a Barrel.
- Money Morning Economic Forecasting Series:
Outlook 2008: Alternative Energy Companies Will Power "Green" Profits in the New Year.
The Great American Streetcar Scandal.
Interstate Highway System.
M. King Hubbbert.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.