Are We Thinking About Gas Prices Incorrectly?

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No one likes to see the price of gas go up. The demand for gas is relatively inelastic, meaning its price can rise substantially without an outsized effect on demand. So it's no surprise that people are disappointed -- and a little ticked off -- that gas prices have gone up more than $2 per gallon in the last several years. Perhaps, though, that's not the best way to think about this issue. 

An artificially low base

The chart below helps to illustrate that the lows seen in late 2008 and early 2009 were an aberration, not the norm.

Source: U.S. Energy Information Administration

But let's recall (as if we could forget) what was happening in the economy at that time. Almost everything with a quantifiable price was cratering around us, or approaching multi-year lows. The S&P 500 (INDEX: ^GSPC  ) fell off a cliff, losing nearly half its value in just nine months. A nearly apocalyptic fear brought the price of gas to levels we hadn't seen in years. Unsurprisingly, some of the major players in integrated oil and gas were trading on the cheap, too, in no small part because of the uncertainty in oil and gas futures. On October 10, 2008, for example, Chevron (NYSE: CVX  ) was trading at what is now its five-year low, and its peers were heavily discounted, as well:


Oct 10, 2008 price

Price today

Percentage gain





Occidendal Petroleum (NYSE: OXY  )




ExxonMobil (NYSE: XOM  )




 Source: Marketwatch share data and FoolTools

Accounting for dividends, a portfolio investing in equal portions of the above three stocks would have returned 95.8% in the past four years. Keep in mind these are some of the most massive companies in the world. They pay dividends (and pretty good ones, too), they have built-in demand for their product, and their business model is proven and lucrative. And yet, just four years ago, the market thought they were worth about half what they're worth today.

The market can be wrong sometimes. It can gyrate dramatically and overcorrect in times of fear and uncertainty, like during the financial crisis of 2008 to 2009. So we should be careful what we wish for when we pine for those days of $2 gasoline again. In modern times, that price indicates some trouble with the economy. A $2 gallon of gas is nice, but you better hope you're still getting a paycheck to buy it with.


John Divine has no positions in the stocks mentioned above. You can follow him on Twitter @divinebizkid and on Motley Fool CAPS @TMFDivine.

The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On October 13, 2012, at 2:48 AM, Stevecamel wrote:

    I must disagree with the thought stream proposed. The dollar value is determined by supply and demand. At least that was before futures traders learned they could artificially drive demand up by trading more futures that was actually produced. I believe one radio station reported for every barrel of oil produced 27 barrels of futures were traded. The article went on to tell what the production was for the day. It was high, real high. Actual consumer demand was drastically down due to the high price. I don't understand how what they did was legal. I am guessing the legal ramifications would be even more astronomical, tho.

    But... overall his main thesis is quite correct. I own over 2,000 shares of CVX. I receive a nice dividend every quarter. I've been able to sell 1/2 my stock to buy a $238,000 house and still have more stock than I started with because of stock splits. This stock has been good for our family.

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