Oil prices will inevitably rise, because that’s what they do

We hope you’re enjoying cheap gasoline for the holidays. Because the party will end sooner or later, and the hangover will be a doozy.

The national average for regular gas stood at $2.004 Friday (that extra four-tenths of a penny pays for the window-washing fluid), according to AAA. At this point last year it was $2.477. But good news for consumers is bad news for the oil patch, and anyone working in it: West Texas Intermediate crude, the U.S. standard, fell to $34.29 Friday, the lowest it’s been since February 2009.

The shale revolution is in trouble, and American drillers are scrambling to slash costs. Tens of thousands of workers have been laid off, and the sector is littered with defaults.

People who assume we can drill our way to oil independence don’t grasp the current economic climate: Depending on the well, producers need oil to be at a certain market price to be able to lift it from shale-rock plays and sell it at a profit. The “break-even” point varies wildly, but even if you accept the low end of the spectrum, about $42, that’s still not enough.

The result? Abandoned wells, declining U.S. production, and more oil needed from exporting nations like Saudi Arabia, Iran and Venezuela.

“We will see growing world demand, and in the end we’ll see the price go up again,” Fuel Freedom Foundation co-founder and chairman Yossie Hollander told Fox News’s “America’s Newsroom” program on Friday. “And that does not include the possibility of Putin or anybody else bombing some oil routes during the war with ISIS. And then we’ll see oil prices rise again. We know they will.”

Watch the interview here:

A member of the foundation’s board of directors and advisors, former Shell Oil president John Hofmeister, painted an even more dire picture this week on Fox Business. Stuart Varney, host of “Varney & Co.,” asked Hofmeister point-blank: Isn’t cheap gasoline good for average Americans?

Absolutely. And they should enjoy every extra nickel that they can keep in their pocket. I’ve said that from the very beginning, from the price fall: It’s good for the consumer. But the larger economy will suffer, and the consequence for the consumer will be a ‘snap-back’ in gasoline prices when the oil price skyrockets, maybe at the end of ’16 … maybe in ’17. It’s coming back, Stuart.

WTI2Although no one can know for sure when the surge might come — oil analysts are notoriously wrong — the last 20 years show how the frequency of peaks and valleys for a commodity that, before 1973, was as boring as it got. According to the chart above, WTI oil shot to a record high of $145.58 in July 2008, preceding the financial crisis, before slipping back. It climbed back to nearly $106 in June 2014 before falling again. It goes in cycles.

Until we start using more alternatives to oil, we’ll be captive to the volatility of the global oil market. One solution is to capture more natural gas that comes up from oil wells and use it to make ethanol that can run in nearly 20 million flex-fuel vehicles. Gas currently is trading at 16-year lows, and is still many times cheaper than oil on an energy-equivalent basis.

“Everybody talks about the oil and gas industry, but we’re using only the oil,” Hollander said. “We’re not doing anything with the gas; we’re either keeping it in the ground or burning it in the air, because we have nothing to do with it. We can take the natural gas and replace the diesel in the trucks. We can take the natural gas and convert it to ethanol and methanol that we can put in our own cars with very small conversion costs, less than $300. So if you’re driving an F150 or a Silverado anywhere in the United States, with a very small conversion cost we can potentially put other fuels in the same tank at the same time that you put gasoline. “Then we’ll have competition. That’s what drives prices down.”

Here’s the Hofmeister interview:

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  1. […] The obsession over the price of oil. Every host on business cable news is fixated on the day-to-day rise and fall (mostly fall this year) of crude. Where will it go in 2016? It’s all pointless busywork, the forecasting. As long as oil has a monopoly on vehicle fuels, we can’t be surprised when oil spikes without reason. […]

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