$6.00 Gallon Gas in the Near Future? - 1/2/08

Hobert Pruitt
Beyond Fossil Fuel Columnist

My son and I recently watched the movie “I am Legend” where New York was basically evacuated in 2009.  The first part of the movie shows an abandoned gas station advertising $6.00 a gallon for unleaded fuel.  I thought to myself that is about right for 2009. 

In 1999 spot gold was trading at $250.00 per ounce and oil was trading at $10.00 per barrel, which was down from their last peak in 1980 at $850.00 and $39.00.  At the moment this article was written gold is over $800.00 and oil is near $100.00.  Will commodities continue to go higher for the years to come?  Gold’s all time high of $850.00 is close to being broken and of course oil has never been higher using 2007 dollars.  Some people believe there will be lower commodity prices in 2008 and 2009, but most believe the opposite. 

Commodity super cycles go through 10 to 20 year cycles.  The price will rise for 10 to 20 years then fall for 10 to 20 years.  So where are we at in this current cycle? 

Jim Rogers, a very successful professional investor may give us an idea in his book:  Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market.  His book historically shows in the last 100 years the 10 to 20 year cycle of rising then falling commodity prices.  Between 1906 and 1923 there was a rise in commodity prices, afterwards, between 1923 and 1933 prices fell.  Then a 20 year rising of prices until 1953.  A 15 year fall followed lasting till 1968.  Then another rise till 1982, bringing gold and oil to their peak level in 1980, of course using the value of the dollar in 1980.  Another fall in prices was between 1980 and 1999.  Of course now we are in the eighth year of  current commodity bull market, so that gives us two to twelve more years of higher gold, oil and most other commodities. 

Why do we have these cycles?  Roger’s logical answer is during a rise in prices, producers of commodities wait to see if the rise in prices will continue, before investing in mining for metals and minerals or drilling for oil and natural gas.  When the producers decide to invest, it takes time to get through the red tape and environmentalist. 

Food commodities move much faster and can be a good indicator of a new bull market.  The surge in corn pricing and production is due to the demand for ethanol due to higher oil prices.  More corn production caused other commodities like wheat to rise because corn was grown in place of wheat.  Higher oil caused more demand for nuclear power causing a rise in the price of uranium.

It takes years for alternatives to come into play with nuclear power, wind power and fuel efficient cars.  But when the new mines and oil wells are fully operational the rise in commodities should near an end and we should see another cycle of falling commodities.  During the period of over production this causes falling prices.  The producers find it is not economically viable to invest in new facilities to produce more until demand again runs over supply, pushing prices up in a new cycle.  This goes back to the old rule of supply and demand.  Roger believes the current rise in commodity pricing will continue for the next few years.

Adding to this cycle of higher oil prices one may factor in Hubbert’s "Peak Oil Theory".  Peak Oil is also called Hubbert’s peak named for the Shell geologist Dr. Marion King Hubbert. In 1956, Hubbert predicted that US domestic oil production would peak in 1970 and he was correct.  He also predicted global production would peak in 1995, which it would have had the politically created oil shocks of the 1970s not delayed the peak for about 10 to 15 years.

The experts that have studied Hubbert’s theory believe we are at the peak of oil supply for the world and in the next coming years we should see a radical change in life as we know it.  Everything in today’s society depends on oil and without it we may see a period of chaos. 

A third factor adding to the rise of oil and other commodities is surge in demand from China and India.  Their industrialization and veracious consumption will push prices higher.  

The fourth factor is the increase in the money supply which increases the price of commodity prices.  More money governments like the U.S. print and put in circulation more money, therefore, the more money it takes to buy commodities.  Also when Fed prints more money and lowers interest rates, this makes commodities cheaper for foreigners, which helps push up the dollar price of commodities.

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