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$200 Crude Oil Coming Soon
By JD Bluefield | May 7, 2008
That is the prediction made by Goldman Sachs yesterday. According to the Business Week article, they’re looking at a window between 6 months to 2 years. Pretty vague, but keep in mind there are many factors at play here. Last year they predicted $100 oil, and that came true sooner than expected. The new record reached yesterday was $123/barrel.
What does $200 oil mean for you? First, gasoline will shoot through the roof. How much you might ask? If you take a look at my post, Windfall Profits Farce Part 2, you’ll see that around 75% of the cost of gasoline comes directly from the price of crude oil . In the example, the crude oil cost is $2.83/gallon. That number comes from the fact that there are 42 gallons in a barrel of oil. So for that example, they assumed a $119 barrel of oil, lets Engineer out how this and future gasoline prices will work out:
($119/barrel) divided by (42 gallons/barrel) equals ($2.8333333/gallon)
That’s how the California Energy Commission comes up with $2.83. Now if you extrapolate that equation for a $200/barrel of crude oil.
($200/barrel) divided by (42 gallons/barrel) equals ($4.761904…/gallon)
Now assuming that the taxes and fees remain constant, add on $1.06 and you get:
$5.82/gallon of gasoline.
How many miles per week do you drive? I quickly put together this table to show the annual costs for gasoline if you drive a car that gets 25mpg. If you drive a big truck, van or SUV that gets around 12-15mpg, just double these numbers and its around there.
| Miles Driven /Year | Gal/yr for 25mpg car | Annual Cost for $3.50 /gal gas | Annual Cost for $4.00 /gal gas | Annual Cost for $5.00 /gal gas | Annual Cost for $6.00 /gal gas |
|---|---|---|---|---|---|
| 5,000 miles | 200 gal | $700 | $800 | $1,000 | $1,200 |
| 10,000 miles | 400 gal | $1,400 | $1,600 | $2,000 | $2,400 |
| 15,000 miles | 600 gal | $2,100 | $2,400 | $3,000 | $3,600 |
| 30,000 miles | 1200 gal | $4,200 | $4,800 | $6,000 | $7,200 |
So, how can you Engineer your finances? I really can’t argue with Goldman Sachs’ prediction. I don’t see any immediate drop in gasoline/oil demand or relief in supply. So instead of ignoring this info and writing it off, take a moment and see how these numbers fit into your budget and monthly expenses. Can you take a hit like that? If not, you might want to think about, A) Asking your boss for a raise (which you’re unlikely to get in a recession); B) Spending less money on other expenses (keep in mind that oil factors into food prices and most other products); C) Buying a smaller/more efficient vehicle now; or D) All of the above.
How can you Engineer your investments? I’ve talked about how you can profit directly from oil, but there are many other ways to go about it. There are car companies, like Toyota and Honda, who are well positioned to take advantage of the coming high gas prices. They have both done so at the expense of the top American car manufacturers. GM may head off Toyota on the plug-in hybrid, but we’ll have to wait and see. They are rushing to production and have much more catching up to do. Then there are the companies developing the next-gen batteries that go into these hybrid vehicles. Chevy is working on an electric car with A123, LG Chemical, NEC and Hitachi, Toyota is in cahoots with Panasonic EV Energy, and the next Saturn plug-in hybrid will also use A123.
Bottomline: Oil will soon hit $200/barrel, everyone will talk about solar, wind and hydro saving the world, going green will become more hot then ever, Bono will stop RED Tour and start a GREEN Tour, they’ll revive the Captain Planet cartoon… by then we’ll be half way to the 35mpg CAFE law, diesels and hybrids will be ubiquitous and everyone will forget what they were complaining about and accept $6/gal gas as just another daily expense…
Topics: Investing |
2 Responses to “$200 Crude Oil Coming Soon”
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May 7th, 2008 at 9:53 pm
My coworker asked me for advice. He said he was paying one third of his income for gas. He has a Sentra and lives one hour away by freeway. That would make it about 80 miles. His other car is a minivan. I told him to inflate his tires to 38 lbs and put in K n N air filter. Get rid of the van.
He feels that his only hope is to find a job close to home. He said he cannot move.
This is typical for southern California. Another co worker drives 2 1/2 hours to work with no traffic jams. That’s a five hour commute. There are several who are more than 1 1/2 hours away. People have moved farther away in order to afford homes. Now they are faced with rising gas prices on top of a new mortgage. This can only mean disaster.
May 8th, 2008 at 8:00 am
Many areas, like Southern California, are facing this “perfect storm” of decreasing home values, increasing gas prices and a slowing economy. What is going to be the straw on this camel?