All Cars, All the Time

Oil In the Year 2006

Will 2006 be the year of sustained $3.00+/gal gasoline? Over the past year, it has become more apparent that with the world’s oil supply losing its elasticity any major event can cause prices to skyrocket. Investments in energy have on the whole performed very well lately and that has brought in a new round of capital that is driving up prices. Of course we’ve all heard the stories of economies such as China gulping oil at ever increasing rates and stretching the world’s supply. Political instability in Nigeria, Iran using oil as a bargaining chip, the war of words between Venezuela’s President Hugo Chavez and George Bush, and the constant threat of a terrorist attack certainly are huge factors in the current price of oil. The coldest Russian weather in about 30 years is reducing oil output and Norwegian oil and gas production may be reduced next month if a labor union and Norsk Hydro ASA fail to resolve a conflict over a tariff agreement. If any of these factors fares up, especially Iran, oil could skyrocket well past $60-$70 band that it has been trading in.

OPEC will likely decide to maintain production targets and the International Energy Agency has pledges to release of emergency stocks from its members should Iran or Nigeria’s situation deteriorate. However, I think that these factors are mere drops in the barrel. In my mind it’s only a question of when, not if, oil will rocket past the $70 per barrel mark. But will it stay there? Supplies of oil that were too expensive to tap suddenly become an option. Looking past 2006 there will be new inflows of oil being brought online and some price stability could be achieved.

What does this mean for all of us in the bleachers with gas tanks to fill? Jumping into a more fuel efficient vehicle depends on what kind of price shocks your budget can absorb, what your political consciousness will allow, and what your family situation dictates. When gas shot up to $3/gallon after Katrina the US there was some decrease in consumption. It could be extrapolated from that event that a future spike in prices would result in some conservation on the part of US motorists. It is also no secret that full sized SUV’s have started to wane. The market shift was already occurring before Katrina and a new round of crossovers from all the major manufacturers will accelerate this trend’s momentum. In 2006 the US market will also be flush with a new round of small B segment cars that will feature more agreeable mileage.

It can be easy for folks to dismiss last fall’s prices as a fluke, but a sustained spike in prices, let’s say 9-12 months, could seriously begin to alter the psyche of the American car buyer. Undoubtedly the price per gallon at our local gas station will be the ultimate arbiter of what we drive.