Energy Business

Odds Of $3 Gas By Year-End Grow

gasIt has taken less than three months from oil to go from $65 to $81, a 25% increase. Gasoline prices have not moved up as fast but have risen to $2.50. That price could easily move to $3 by the end of the year.

Goldman Sachs (NYSE:GS) says it expects crude to move to $100 a barrel in 2010, and a number of factors could cause the timing of that increase to come sooner rather than later. At $100, oil would climb another 23% from its current price.

The most commonly mentioned reasons for rising oil prices are growing demand, particularly in China, and the failing dollar. The dollar recently broke the 1.5 euro level and a tendancy for investing in risky assets as the stock market rises becomes more tempting for investors as each day passes. An ongoing rise in equity prices should pull more cash into these markets.

The theory that China’s growth will put more pressure on crude prices became more plausible as GDP in the world’s most populous nation rose above 8.9% in the third quarter. Many economists expect China’s economic growth to be closer to 10% next year, which will almost certainly cause speculators to bid up crude as the year draws to a close.

The other factors which seem to be pushed oil prices higher are cold weather in the Northern Hemisphere, political upheaval in oil producers including Nigeria, and falling exports from large producers like Mexico. Mexico is not the only example of a country with aging fields and a need to keep more oil “in country” for the building of its own infrastructure. Global oil supply may not be as elastic as it was just three or four years ago.

Gas prices do not rise in exact proportion to oil. Refinery capacity and production is another critical factor of pricing. But, if oil moves higher by another 20% this year, $3 gas will not be far behind.

Douglas A. McIntyre