Why Gas Will Never Hit $5 a Gallon

The cost to fill a tank of gas is one of the single biggest expenses most families have aside from the cost of housing. When the cost of gas goes up, it puts a strain on our bank accounts, and when it falls it's a small reprieve.

So, long term, the cost of gas and oil is very important to the economy, and for the past decade the cost has been moving higher. The good news is that demand for oil has been falling, U.S. production is rising, and alternatives are becoming a reality. With those facts in mind, here are the three biggest reasons gasoline won't move much higher and why I think we'll never see $5 per gallon at the pump.

Demand is falling
Demand for oil and gas in the developed world has been declining for nearly a decade, and the pace is increasing. The biggest factor driving down demand for oil isn't that people are driving less; it's efficiency in the miles we are driving. A decade ago, SUVs and massive trucks were the most popular wheels on the road; today, small cars, hybrids, and even electric vehicles are replacing them.

European Union Gas and Diesel Oil Demand Chart

European Union Gas and Diesel Oil Demand data by YCharts

Long-term, this trend will only continue. The Obama administration has rolled out a 54.5-mile-per-gallon corporate average fuel economy standard for the auto industry, which will take effect in 2025. Not every vehicle will get 54.5 miles per gallon, but fleets have to improve efficiency dramatically, and as they do, demand for oil both in the U.S. and internationally will fall.  

Oil isn't as inelastic as it used to be
It used to be that oil could climb continuously and people would pay whatever it cost, with little alternative. In economics we call that situation inelastic demand, and it's why OPEC had such power over the global economy.

But over the past decade, the elasticity of oil has increased, and alternatives have a lot to do with it. Clean Energy Fuels (NASDAQ: CLNE  ) is supplying buses and local trucks with natural gas at a lower cost than diesel, and the company is building a national infrastructure for the trucking industry. Westport Innovations (NASDAQ: WPRT  ) is providing the technology to bring that natural gas to the trucking industry, saving money over diesel and lowering demand from one of the biggest users of oil.

As these two companies gain traction in trucking fleets, the availability of natural gas will grow, and even passenger cars will begin to see more natural gas options. The relatively high cost of oil and the relatively low cost of natural gas has made this alternative a reality.

More concerning for oil companies should be the wild success Tesla Motors (NASDAQ: TSLA  ) has had selling electric cars. Tesla won't electrify the entire auto fleet overnight, but it's now proved that EVs can be a success, something that was a pipe dream just a few years ago. Chevy and Nissan have given EVs a go with little success, but Ford has a decent car on its hand with the Ford Focus Electric. Mercedes and Toyota are also trying their hand at electric vehicles, and they're calling on Tesla to design the drive train.

An electric vehicle may not make sense today, with gas averaging $3.64 nationally, but if it jumped to anywhere near $5, you can bet millions of people would consider going electric. Long term, as technology improves, EVs will continue to take share, reducing oil demand and providing an alternative that puts a cap on how high gas prices can go.

Supply can turn at at the drop of a hat
When OPEC commanded the world's oil market and prices were inelastic, it could control supply and prices as well. But the oil-supply business is no longer the monopoly it once was, with ultra-deepwater offshore drilling growing and fracking expanding in the U.S. and abroad.

What has become more elastic than demand for oil is the supply. When oil flirts with $100 per barrel, companies scramble to drill more wells, and when it falls, they cut down on capital spending. Fracking can cost $70 per barrel just to produce oil, so supply shuts off if prices get too low. But the reverse is true, and when demand goes up, supply suddenly hits the market.

We can take drilling in North Dakota as a proxy for this phenomenon. When oil fell below $40 per barrel in early 2009, the number of rigs drilling fell off the map. As the price rose from 2009 to 2012, the number of rigs grew, and now that the price of oil has begun trending slowly downward, so has the number of rigs in action.

North Dakota Inland Rotary Rigs Chart

North Dakota Inland Rotary Rigs data by YCharts

Of course, increased drilling in North Dakota does have its side effects. Regional price spikes are getting worse, and depending on where you live, you may be thinking that gas-price relief hasn't hit your pocketbook. The Midwest and California have seen unusually high gas prices this year, but that's largely driven by regional refinery outages and a lack of infrastructure to get oil from new wells to refineries. But overall, gas prices nationally have been flat for about two years.

US Retail Gas Price Chart

US Retail Gas Price data by YCharts

Foolish bottom line
When we look at the national and global picture, there's beginning to be a lot of downward pressure on oil and gasoline prices. Lower demand, increased supply, and alternatives from other energy sources are just a few of those factors. We have yet to hit $5 per gallon of gasoline nationally, and with the macro trends I'm seeing, I don't think we ever will.

There are many different ways to play the energy sector, and The Motley Fool's analysts have uncovered an under-the-radar company that's dominating its industry. This company is a leading provider of equipment and components used in drilling and production operations, and poised to profit in a big way from it. To get the name and detailed analysis of this company that will prosper for years to come, check out the special free report "The Only Energy Stock You'll Ever Need." Don't miss out on this limited-time offer and your opportunity to discover this under-the-radar company before the market does. Click here to access your report -- it's totally free.


Read/Post Comments (43) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 09, 2013, at 1:09 PM, jamesdan567 wrote:

    Gasoline has already been well above $5 a gallon in Southern California. I have seen $5 plus at the pump. Even today, many stations here sit at $4.50 a gallon. Since at least 1970, all benefits from increasing gas mileage have been more than offset by increased gas prices at the pump. Will oil companies sit idly by as increased gas mileage standards chews into their profits at the pump? I seriously doubt that. if demand weakness beats up downstream profits, refiners will go out of business and gas stations will close, and these factors do not lower gas prices at remaining pumps.

  • Report this Comment On June 09, 2013, at 4:18 PM, Jackl1956 wrote:

    In 2009 China bought more than the United States. In 2012 China bought more cars than the European Union. Extrapolate the price of gas as China's economy continues to accelerate.

    I am long on Tesla Motors.

  • Report this Comment On June 09, 2013, at 6:20 PM, Marshgre wrote:

    "Chevy and Nissan have given EVs a go with little success, but Ford has a decent car on its hand with the Ford Focus Electric."

    What? Ford Focus Electric is at best a compliance car. I could go buy the Chevy Volt hybrid or the Nissan Leaf EV tomorrow if I wanted to, but Ford won't sell a Focus EV to me because of where I live. That's probably why their sales are so poor.

    Gas has and will hit $5 a gallon as world demand goes up. You cannot look at one market for price modeling of a product with global demand.

  • Report this Comment On June 09, 2013, at 10:09 PM, wdcraftr1 wrote:

    Obama has said he wants Really High gas prices in order to boost interest in Green energy. I can see a lot higher gas prices..

  • Report this Comment On June 09, 2013, at 10:15 PM, LiamGat wrote:

    Never say never. Hello, inflation. Hello, increasing worldwide demand. Using oil for vehicle fuel is such a waste. And just because domestic production is going up doesn't mean prices will stabilize or go down. Talk about short sighted.

    Renewables are already more economical in many markets unaided by government intervention. Hello, Brazil. This is horrible investment advice.

  • Report this Comment On June 10, 2013, at 10:12 AM, StanO6 wrote:

    Is this April 1? Of course gas will go above $5. DOH!

  • Report this Comment On June 10, 2013, at 5:00 PM, Ad1288 wrote:

    Prices for premium are already over $5 in Chicago...

  • Report this Comment On June 10, 2013, at 5:02 PM, Seanickson wrote:

    teslas wild success? its an interesting story but I've yet to even see a tesla yet. Here in northern California though there seems to be a lot of leafs around

  • Report this Comment On June 10, 2013, at 5:07 PM, BioBat wrote:

    I live in the Midwest and saw gas prices spike 50 cents a gallon overnight. I realize that falls into the regional excuse that you throw up but assuming it can't happen nationally or globally doesn't help the argument any.

    On electric cars. If you think the Volt hasn't been a success, but the Tesla has, you're not paying attention. Chevy sold 23K Volts last year and is on pace to sell slightly more this year, which puts it near the bottom of the Chevy/GM fleet but still ahead of the massive failure called Corvette (yes, that was sarcasm) and well ahead of what Tesla has sold.

  • Report this Comment On June 10, 2013, at 5:09 PM, terryongarland wrote:

    Regardless of oil supply,the lack of refineries is the reason why gas could go over $5. In the last 30 years the number of operating refineries has dropped almost 50%.

  • Report this Comment On June 10, 2013, at 5:16 PM, ralphbaird wrote:

    You need to see and discuss taxes; gasoline is the only retail product advertised with the tax included. Look at the taxation on retail gasoline in Europe.

  • Report this Comment On June 10, 2013, at 5:17 PM, RNonGroundZero wrote:

    Why gas will never hit $5 a gallon...in Saudi Arabia.

    (just change "gallon" to "liter.")

  • Report this Comment On June 10, 2013, at 5:24 PM, TomPodesta wrote:

    The taxes on gasoline will reach $5 if the Pols had their way. Ultimately, they will:

    Gas $2 a gallon

    Taxes $4 a gallon

    Already they are trying to gig the hybrids for lost tax revenue.

  • Report this Comment On June 10, 2013, at 5:36 PM, WR338 wrote:

    " The Midwest and California have seen unusually high gas prices this year, but that's largely driven by regional refinery outages and a lack of infrastructure to get oil from new wells to refineries. But overall, gas prices nationally have been flat for about two years."

    Hmmm... the day of the Boston Marathon bombing, gasoline went up by 25 cents a gallon within 2 hours of the incident and stayed there for 3 days here in Michigan. A few weeks after that, there was a refinery fire in the Detroit area, followed by a 20 cent increase...even though the press reported that the damaged area of the refinery had no effect on production.

    The only way to beat this monster is to own some of it!

  • Report this Comment On June 10, 2013, at 5:50 PM, Mega wrote:

    "But over the past decade, the elasticity of oil has increased, and alternatives have a lot to do with it."

    Completely unsupported by evidence, in fact the opposite trend is apparent.

    http://www.nature.com/nature/journal/v481/n7382/images/48143...

  • Report this Comment On June 10, 2013, at 5:58 PM, driller101 wrote:

    Never is a long time. Don't guess this guy wants to give odds on this for the next 10 years?

  • Report this Comment On June 10, 2013, at 5:59 PM, mergerman wrote:

    Could you explain inelastic and elastic demand again. I am confused. In fact this whole article is confusing. Not a typical MF help piece.

  • Report this Comment On June 10, 2013, at 6:07 PM, PeakOilBill wrote:

    The developed world can never reduce oil consumption as fast as the developing world can increase it, because there are far more people living in the developing world. Millions get rich enough to buy their first car each year.

    Unless we have another 2008 type global recession, gas will continue to gradually go up in price. A regional war in the Middle East could easily send it to $8 a gallon within a month.

  • Report this Comment On June 10, 2013, at 7:17 PM, TMFFlushDraw wrote:

    @mergerman

    Elastic demand means demand changes a lot when price changes. So, if you're willing to buy 20 gallons of gas per month at $3 per gallon and will still buy 20 gallons per month if it's $4 per gallon there's no elasticity.

    If, on the other hand, $4 gas might cause you to buy an EV or a natural gas vehicle then demand becomes more elastic.

    Supply is the same concept. If oil goes up and production goes up (like it does in ND) then supply is elastic.

    Hope that helps,

    Travis Hoium

  • Report this Comment On June 10, 2013, at 7:27 PM, JavaChipFool wrote:

    I am glad to see everyone pretty much agrees with a WTF was that article about! 5$ a gallon? Ha ha, if only that's the highest we ever see.

    32 years ago I had a freshman Econ course where we discussed oil not gong over 200$ a barrel in the next 10 years(a few years after the '79 oil embargo, for the mathematically challenged). I wonder what number they're throwing around now...

  • Report this Comment On June 10, 2013, at 8:37 PM, drdan4n6xprt wrote:

    As stated by others in S. California it is frequently above $5/gal. The petroleum industry (with the undocummented help from the legislature) creates an artificial demand/shortage by either shutting down "for maintenance" or just cutting back on production. 1000 gal @ $3 is a lower profit than 600 gal @ $5/gal.

    And in CA because of fuel efficient vehicles reducing the deman, the legislature has raised the tax on each gallon of gas. As the demand continues to drop the tax will continue to rise so gas can reach $6+/gal

  • Report this Comment On June 10, 2013, at 8:38 PM, hifive55 wrote:

    Better check current prices in IN and other areas before you make such an uninformed assumption.

    Good Grief. The author should be ashamed.

  • Report this Comment On June 10, 2013, at 9:03 PM, mmccarvi wrote:

    I think it is only reasonable to assume the author was referring to "todays" dollar when discussing $5 a gallon gas, not inflated dollars, and he was also not considering the possibility of added taxes. Nonetheless I think he is dead wrong. As for alternatives, the all electric car is probably never going to catch on, but the plug in hybrid is already here and it does really get close to 100 MPG for trips of 20 miles or less and has no range limitation. Visit a Ford Showroom and take a look at the C-Max Energi and the Fusion Energi. They are here now and they work !

    Meanwhile the developing nations will continue to keep pressure on oil and gas prices despite no fuel saving innovations.

  • Report this Comment On June 10, 2013, at 9:19 PM, voiceanew wrote:

    I am sure that the price will rise above $5.00 a gallon.The oil companies are putting a spin on how muich more expensive it is to get to the oil and the refining cost.We will pay!!!

  • Report this Comment On June 10, 2013, at 10:12 PM, xetn wrote:

    This article is a complete load of c**p! As others have already pointed, the price of gas/gal has already been over $5.00. So, what is the point of this article? Blow smoke?

  • Report this Comment On June 10, 2013, at 10:30 PM, PopeJeffMo wrote:

    I think it's only reasonable to assume the author is just a young fellow who doesn't truly understand that "never" is a really long time.

  • Report this Comment On June 11, 2013, at 12:28 AM, carl1942 wrote:

    Please help !! Why not consider in the next 5-7 years FUEL CELL technology??

  • Report this Comment On June 11, 2013, at 4:22 AM, ostreger wrote:

    You cannot be THIS short of a shock headline!

    I don't know when but I am utterly sure that the price of petrol, certainly in dollars but likely otherwise as well, will rise beyong $5 or any other level specified in a fiat currency. There are just too many nasties that can happen, and too many years - decades? - in which they might.

  • Report this Comment On June 11, 2013, at 6:30 AM, FoolEveryone wrote:

    Gas is right about $5 in Chicago right now.

  • Report this Comment On June 11, 2013, at 6:44 AM, djplong wrote:

    There are just too many reasons why gas could easily go over $5/gal. Why doesn't it do it now? Well, economic weakness DOES have something to do with it. But consider that our infrastructure is falling apart and we HAVE to pay the bill for it SOMEhow. On top of that, gas at $3 was unthinkable not too long ago - then it spiked over $4 before falling when The Great Recession hit. The next time we get a squeeze like that, we'll probably pike over $6/gal and be "happy" with $5.

  • Report this Comment On June 11, 2013, at 7:47 AM, NOTvuffett wrote:

    If you live in Europe this should tell you that you are being ripped-off, lol. If you want to feel like you are getting butt raped every time you go the gas pump, vote for these jokers, lol.

    Supply- demand, distribution comes into the mix like any other commodity. Let us take it point by point. Supply, this administration has tried to block drilling, not only off the gulf. Oil production has only increased because of production on land that they do not control. Demand- at every turn they have sought to impede it (by giving your tax dollars for subsidies). Distribution- how do you think oil moves long distances economically? Pipelines is the answer and they have blocked those.

    When an electric car does what I want, I will be happy to buy one, but I think it is wrong to try to force technology- it has to progress at its own pace. Ok, don't give me that crap about the internet.

    The graphene capacitor tech looks interesting.

    What the heck am I talking about? and to whom? lol. It is too early in the morning, this is usually when I am drinking my coffee, reading the news and wondering how this world got so messed-up.

    For a purely technical trade, maybe TSLA is a good one. Sorry if I sound cranky, my coffee hasn't soaked in yet.

  • Report this Comment On June 11, 2013, at 9:26 AM, schenck51 wrote:

    "Wildly Successful"??? Telsea's success is currently dependent on "carbon credits" that are purchased by other auto manufacturers while they catch up with their own production of EV's.

    Once caught up, they will not longer purchase those credits. In that the credits represent a major portion of Telsea's income, Telsea will have to stand on its sales alone. Hard to compete even up with the big boys when all subsidies are gone.

  • Report this Comment On June 11, 2013, at 10:15 AM, flatroofer wrote:

    We have been paying $11 for the past 2years.!!

  • Report this Comment On June 11, 2013, at 10:34 AM, winebroker2000 wrote:

    The one, sure reason, why gasoline will DEFINITELY soar well above $5 per gallon is basic economics:

    With Helicopter Ben running the government printing presses 24/7, pumping out $1 TRILLION dollars a year into the economy, the dollar is debasing so fast we will probably see $25 per gallon in our lifetimes (and I'm in my '60's).

    The U.S. government can change the measurement criteria to fudge the C.P.I., not count unemployed workers who give up trying to find a job to pad the unemployment numbers, manipulate the paper markets for gold and silver so we don't see how much our dollar is devaluing, but the proof is at the pumps -- where we see daily what our dollar really buys.

    And remember, we are the world's "reserve currency" (for now!), so oil and gold are priced in U.S. dollars, which gives us a further advantage. Already, China, Russia, France, Japan, Saudi Arabia, Qatar, Abu Dhabi, and Kuwait are proposing to trade oil not in dollars, but in a basket of currencies which include Japanese Yen, Chinese Yuan, Euros, gold, and a new, unified currency for the Arab Gulf states.

    Gas will most certainly be over $10 per gallon before this decade is over . . .

  • Report this Comment On June 11, 2013, at 4:59 PM, mtspace wrote:

    The article raises interesting points. 1) demand for oil is dropping in the developing world. 2) there are viable alternatives and 3) We'll make more.

    The argument against 1) is that the markets in the developing world are potentially four or more times as large as those of the developed world. There is reason to believe they could grow faster than demand is shrinking in the west until they approach the same per capita level of usage.

    The argument against 2) is that alternatives such as electric vehicles are more expensive. An all-electric car before it has been sold to a consumer has already consumed more energy in its manufacture than most gasoline powered cars will consume in a long lifetime of gasoline guzzling. This limits how quickly we can move from one alternative to the next. Similarly, it's too early to tell whether fracking is as effective as it has been assumed to be - a lot depends on how quickly production drops off. If it drops too quickly we will find natural gas back close to its old price.

    3) Finding more oil and gas has worked in the past. But there is some question about how long it can work in the future. Even if we have 200 years of supply of natural gas in the US, this is a resource which will ultimately be depleted. Oil will run out long before that. Large oil majors have been finding it impossible to find oil so fast as they pump it from the ground.

    So we are faced with dwindling supply and burgeoning demand. The long term trend for oil prices has to be upward. And this must be exacerbated by central banks simultaneously flooding the markets with money.

    The only thing that could certainly stop gas from ever going over $5.00 a gallon is a complete collapse of civilization. And that seems like too high a price to pay.

  • Report this Comment On June 11, 2013, at 5:22 PM, Samskiman wrote:

    I'm sure it's been said already, but I'll say it again.... never is a long time, and it won't take that long.

  • Report this Comment On June 11, 2013, at 6:21 PM, jtmccjr wrote:

    If I recall, just recently our government was being called upon to release some of the stock piled oil in the strategic reserve to bring oil/gas prices down. The surplus capacity in the oil business world wide, is not what it used to be. As the economy picks up, so will energy consumption. This occurs here in the US and, more importantly, in the developing world. The demands of developing countries such as China, India, Indonesia, Brazil, and other Latin American countries will put tremendous demands on current and future supplies. I agree with others on this, never is a very long time...

  • Report this Comment On June 11, 2013, at 8:36 PM, Melaschasm wrote:

    The author has an interesting point, but it is natural gas, not electric which is capping fuel prices. Low MPG vehicles driven a large number of miles per week are already switching to natural gas, which is why we are sometimes exporting diesel.

    As pump prices rise, natural gas will become more appealing for a growing variety of vehicles. I suspect that pickups and large SUVs will start having dual fuel options soon. It is difficult to make these vehicles more fuel efficient, but you can drastically reduce pollution and costs with a switch to natural gas.

    While I suspect that pump prices will average more than $5 before the switch to natural gas is complete, it is possible we remain below that threshold if the conversion happens more quickly than I expect.

  • Report this Comment On June 12, 2013, at 9:17 AM, KombatKarl wrote:

    Guess I'm the only one that agrees with the article.

    To those saying "It's already been over $5 here in XYZ". He's obviously talking about the national average, not a current highest price.

    I don't think demand will allow it to get too high. Could it get to $5? I suppose. As others have said, never is a long time. But as we saw when gas prices spiked in 2008, the number of miles drives dropped. As prices go up, we will adapt just as we did then. I don't know much about the politics of it all that goes behind their other points, but as far as supply and demand go, I really believe the falling demand when prices do go up will prevent them from going much higher. I switched to mass transit to get to work in 2007 when prices were rising, and still use it. My daily miles driven dropped from 48 to 15. Given my car's MPG, that's a gallon and a half less that I use every day. And I know I'm not the only one.

  • Report this Comment On June 13, 2013, at 12:02 AM, mikecart1 wrote:

    Not sure how Tesla is stated as being "wildly successful". Other than the stock price which means little right now, they really haven't done much as far as making a sustainable profit of any kind.

  • Report this Comment On June 14, 2013, at 5:47 AM, KongPL wrote:

    If China uses the same amount of oil per capita, we will need another 7 (seven!) Saudi Arabias!! This article is a joke. We will have to change our lifestyles significantly - not sure we are willing to do that. We'll blame Obama forever - cheap shots! Get real!!

  • Report this Comment On July 23, 2013, at 12:34 PM, checker99 wrote:

    I am surprised to read such a wrong opinion on fool.com. $5 a gallon gas is already here, and its clear the Fed's policy is to inflate our way out of the fiscal mess the numskulls in Washington have created. Of course gas will be $5 a gallon, and then it will be $6 and then it will be $7 and so on -- just listen to the Bears ...

    http://youtu.be/40hNSJEKUgo

  • Report this Comment On August 22, 2013, at 6:11 PM, slmskrs wrote:

    Here in Silicon Valley I see Tesla's all the time (and different colors so it is not the same one car I'm seeing over and over again.... :)

    For such a new car, I'm literally seeing several every week now. But I admit, I've got Tesla envy so I notice them more.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2479149, ~/Articles/ArticleHandler.aspx, 11/25/2014 5:09:44 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement