Why Gas Prices May Not Stay Down for Much Longer
Commodities trader Dennis Gartman recently predicted that oil prices would collapse, saying they could go "a lot lower, a lot lower." Goldman Sachs predicted crude oil will fall to $70 per barrel next year as part of a long-term decline in the commodity. Even the U.S. Energy Information Administration predicted that U.S. gasoline prices would average just $2.94 per gallon next year, down from $3.39 in 2014.
Amid all of the predictions of declining energy prices, there are a few reasons to think oil and in turn gasoline prices may not stay down for long. And they're worth understanding whether you're buying gasoline or investing in oil stocks.
The Economy Is Still Going Strong
One of the biggest drivers of oil prices is the global economy, driven by the U.S. and China. Both countries are still going strong, with GDP growth of 3.5 percent and 7.3 percent, respectively, in the third quarter. The U.S. has come out of the recession and is reaching a somewhat steady growth pattern, and the Chinese government seems willing to do whatever it can to keep growing.
As long as the economy is doing well, there's no underlying reason to think demand for oil will shrink significantly. In fact, after declining since 2005, U.S. demand for oil has increased in the last two years on the back of a growing economy, and I wouldn't expect demand to go down now that prices are lower than they've been in three years.
Demand for oil isn't going down at the moment, but prices are, and supply is a big reason. But that excess supply may not last long.
OPEC May Be Ready to Push Oil Prices Higher
The oil cartel OPEC is meeting on Thursdsy, and a number of countries have already called for a reduction in oil supply to increase prices. In other words, when you're gathered for Thanksgiving, the leaders of OPEC will be deciding if they're going to increase the cost of gas.
A lot of OPEC countries have a vested interest in raising oil prices to support their own economies. Venezuela, Iran and Saudi Arabia fuel their economy and provide massive energy subsidies to citizens because they're able to make money exporting oil. As export prices fall, so do cash flows to the government coffers.
There aren't many countries that are happy about low oil prices right now, and the political pressure to cut back on production, even a little bit, is mounting, which could lead to higher oil prices before you know it.
Replacements Are Far From Making a Dent in Oil Demand
One of the big reasons to think gas prices will come down long-term is because alternatives are becoming more attractive everyday. Electric cars are becoming popular, automakers are working on hydrogen fuel cells, and even high efficiency is reducing demand for oil.
In the long term, these alternatives will transition the world away from oil, but we're talking about a transition over 25, 50, even 100 years. A few months are a blip on the screen for alternatives to oil.
%VIRTUAL-pullquote-If technologies that would lead to a drop in demand aren't going to be ready for a decade, why would oil prices fall today?%That's why calls from pundits like Dennis Gartman saying that alternatives like fusion power are going to keep oil prices down are so off the mark. Fusion may very well prove to be the energy of the future in a few decades, but there are exactly zero utility-scale fusion plants in operation today, and researchers have yet to figure out how to scale the technology efficiently. Even bold predictions from Lockheed Martin (LMT) only predict nuclear fusion will be feasible in five years.
The same could be said for solar energy, wind energy, geothermal, and other oil alternatives that are in development stages and are years from breaking the grip oil has on the world. This is important because there's only so much slack in the oil market, and supply must generally meet demand in any given year for the economy to work. So, if technologies that would lead to a drop in demand aren't going to be ready for a decade, why would oil prices fall today?
Before you start thinking sub-$3-per-gallon gasoline is here for good, consider the reasons the commodity may rise sharply in the near future. The world needs oil, and the drop in prices may not last as long as you might think.
Motley Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. Check out our free report onone great stock to buy for 2015 and beyond.