Energy Investing: What happens to gas prices after Iran?
By Adam Lass
In this article
Tempers are boiling high in the Strait of Hormuz, and oil and gas speculation is boiling over at the trading floor in New York.
The Brits have a small advantage in that they actually seem to know where the event took place.
Gasoline prices have been climbing an average of 0.93% per week for all of 2007, and some 2.3% per week for the past eight weeks.
Energy Investing: What happens to gas prices after Iran?
Right now, there is a crisis. In case you missed it, Iran is holding 15 Royal Marines hostage, swearing not to release them until Britain's lame duck Prime Minister, Tony Blair, apologizes for his country's blatant invasion of Iranian waters. Tempers are boiling high in the Strait of Hormuz, and oil and gas speculation is boiling over at the trading floor in New York.
Having displayed backbone for a whole 48 hours, the Brits are now inching their way toward some kind of compromise. What, after all does Blair have to lose, or for that matter, to win?
He has already received the wholehearted backing of the EU and the UN. Both have declared the Brits are absolutely right, and that their constituents will feel really, really guilty every time they buy Iranian oil.
Energy Investing: This crisis will get settled
Neither is true, in that neither the Iranians nor the British are genuinely sure as to who actually owns the waters involved. The Brits have a small advantage in that they actually seem to know where the event took place.
However, there is no treaty on record as to actual sovereignty, and even the most geographically challenged observer must admit that it all took place a lot closer to Iran than England. Finally, to be quite honest, very few EU or UN members seem to have any real qualms re: buying oil from or selling technology to Iran.
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So this will get settled, one way or another. A nameless bureaucrat will write a vague statement and a bank somewhere will transfer previously locked funds to a bank somewhere else. And it will slowly slide off the front pages, to be replaced by some other fracas de jour.
Energy Investing: Don't let the coming lull fool you
So what about energy prices? Will oil futures hold above $63/barrel? Will gasoline continue on its steady march past $3? No… and yes.
No, oil will not hold on to this high. In all probability, we will see futures dip back down under $60, and maybe even dip back toward the low $50s for a minute or two. At this point, all the $30/barrel crackpots will come out of the woodwork again.
Don't get too excited: just as the current crisis won't last, the lull won't last either. Because the price of energy truly has little to do with the Iranian crisis, and everything to do with the poor match between demand and supply's relative elasticities.
Energy Investing: Oil is mathematically locked in
Both sides of the equation can be moved, but by how much and in which direction is another story altogether. High oil prices can and indeed will curtail consumption, but not by but so much or in any short order, as a great deal of use is hardwired into the economy by decisions made long ago and difficult to unmake now in times of crisis.
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An example: GM is contemplating bringing its 50-MPG+ Matiz mini-car (already for sale in Europe and Asia) into U.S. dealerships. Daimler Chrysler has been similarly contemplating importing its super subcompact “armchair-with-a-motor” Smartcar for two or three years now.
Both figure to stop thinking and get moving on the idea if gas gets over $3. However, right now, GM Group Vice President John Smith can't see it happening: “The honest answer is, I don't know yet how serious we are… Our internal forecast shows gas at $2.50 a gallon for quite some time to come.”
Energy Investing: Gas prices will continue to rise
Apparently, Mr. Smith hasn't noticed that gas prices have already beaten the Energy Information Agency's annual 2007 target. Or that the climb to these heights began weeks prior to the latest crisis.
Indeed, prices have been climbing an average of 0.93% per week for all of 2007, and some 2.3% per week for the past eight weeks. Here we see that inequality of elasticity most clearly demonstrated.
While it might take Mr. Smith and his ilk a year or two to start down the path of demand reduction, supply was trailing demand and forcing prices steadily higher before the latest Middle East dust up.
Energy Investing: $3.10 in eight weeks, $4.10 in 16?
And with that trend already in place, it is not hard to predict where gas prices will end up in eight weeks, once the summer driving season is underway: sans crisis, in eight weeks, gasoline will be selling for $3.10/gallon.
Add in a hurricane, or a broken pipeline, or some irate Venezuelans, and $4-plus by mid summer is by no means impossible. My advice is, of course, to continue to lock in oil stocks on any dip.
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Adam Lass is the founder and manager of the WaveStrength Group, and is a contributing editor for Taipan Financial News. As the creator of WaveStrength's proprietary analysis system, Adam's expertise has shaped a franchise of successful investment newsletters and services, including WaveStrength Options Weekly and WaveStrength Apex.
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Related Resources
Strait of Hormoz: Just whose waters are they anyway? - Wikipedia.org
Alternative Vehicles: The GM minicar that will show up too late to help. - MSNBC
Gasoline Report: The latest on gas prices (I'll give you a clue: it ain't going down). - EIA