Prepare for $4 Gas While You Still Can

Posted by Peter Coyne Matt Insley Byron King - The Daily Reckoning

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  • GasPriceTimes were tough when a gallon of regular fetched $3.58 last year… Are you ready for $4 per gallon and more? We show you how to prepare…
  • Think it’s unlikely? $4 gas is in the cards, says Matt Insley, and sooner than you think. It’s all because of the “Middle East Effect”…
  • Then, Byron King explains how the U.S. struck shale oil at just the right time. Yes, the Middle East might be going up in flames… and oil prices will head higher… but that doesn’t mean you can’t carve out a slice of America’s New Age of Wealth for yourself…

Peter Coyne, explaining the chances of $4 dollar gas…

“I just really think that something could be done about the gas prices,” Natalie Hay told her local Orangeburg paper in South Carolina last year as she stood at the pump.

Thanks to still-pricey gas, this ordinary woman had canceled her Independence Day travel plans because she had to pinch pennies.

“I understand everybody has to make a profit,” Hay humbly explained, “but… these gas companies mark record-making profits yearly and the working people are struggling.

“Us working people gotta live.”

Jimmy Weathers, one of “us working people” from Bowman, S.C., agreed. “They need to get on down,” he told the same reporter. With a Ford pickup, Weathers gets 11 miles to the gallon. Maybe 12, if he’s lucky.

That means he needs to consolidate his trips… and stay at home a lot more. He’s essentially lost his freedom. “I am on disability,” he explained, “and I can’t afford to go anywhere.”

Perhaps you can empathize.

If not, a third motorist, Dan Brown, who was from out of town, felt a little differently.

Today, gas prices are lower than in 2008 yet slightly higher than in July 2013.

Coming from Asheville, N.C., where prices had been even higher, he threw in his perspective. “I think they are pretty low,” he said of South Carolina’s gas prices. “It is not as bad as it has been.”

Brown had a point, too. At the time the three talked to reporters, in July of last year, U.S. gas prices averaged $3.58. That was bad enough. But at their peak in 2008, the average was $4.12.

Today, gas prices are lower than in 2008 yet slightly higher than in July 2013. At writing, a gallon will cost you $3.68 on average. Again, that’s bad. But perhaps you should count your blessings…

Because there’s a good chance prices will head back to $4 by the end of the year.

For your editor, it roughly means his ol’ bucket — a 2004 Honda Civic — will cost him at least 12 bucks more per month to drive. And our fiancee’s Audi SUV will cost an additional $20 per month. And it only goes up from there. We’re overjoyed at the thought. How about you?

By way of background, oil prices have been rising over the past week. This morning, a barrel of West Texas Intermediate fetches $106.91. The proximate cause, if you haven’t see it on the internet, is Iraq’s descension into worse-than-normal chaos.

It’s the same old Middle Eastern story — Sunnis vs. Shiites — just different characters. ISIS, or the Islamic State of Iraq and Syria, a group too crazy even for al-Qaida, has been blitzkrieging Iraq. Approaching Baghdad one captured city at a time.

That gets us back to $4 gas and your wallet…

ISIS, or the Islamic State of Iraq and Syria, a group too crazy even for al-Qaida, has been blitzkrieging Iraq.

“While the U.S. only receives about 300,000 barrels of Iraqi crude per day,” explains senior petroleum analyst atGasBuddy.com Patrick DeHaan, “the concern is about the other 3 million or so barrels per day that Iraq pumps, which could be at risk of disruption.”

To give depth to DeHaan’s statement, Iraq was the world’s seventh-largest oil producer in 2013. And it’s the third-largest oil producer in OPEC. To illustrate Iraq’s importance to world supply, in 2012, the International Energy Agency released its “World Energy Outlook Special Report for Iraq.”

In it, the IEA forecast that by 2035, the price of oil would have to be $215 per barrel (about $140 in real terms) — even if Iraq increased its production by 176%, from nearly 3 million to 8.3 million barrels per day. If that’s accurate and production is disrupted, $4 gas will be the least of your worries.

Historically, Iraq’s production is sourced from two oil fields in particular — Rumaila and Kirkuk. For now, neither has been captured by ISIS.

But if they do fall to the rebels — or at the rate things are going, when they fall to ISIS — you’ll once again see what our dynamic resource duo, Byron King and Matt Insley, have dubbed “the Middle East effect.”

At that point, you’ll wish you had invested ahead of time…

To see what we mean by the Middle East effect, just look at the price of oil since 2011, keeping in mind the myriad turmoil in the region:

REC 07-25-13 Update

“$4 gas could easily be in the cards,” explains our own Matt Insley. “In fact, if Iraqi oil production goes offline because of sectarian violence or if oil supplies are disturbed for other reasons, you’re in for an oil price nightmare.”

He’s talking about $150… $200 or even $220 per barrel.

“Think back to 2008,” Matt reminds you. “Back then was the last time we saw $150 oil. And gas prices topped $4.”

“But wait,” we hear you pleading… “You spent all of last week reckoning about the U.S. energy renaissance. America’s experiencing a ‘New Age of Wealth,’ isn’t it? Oil and gas is flowing… That means the price at the pump should fall.”

And you’re half correct. Thanks to fracking for shale oil, the U.S. has indeed ushered in a New Age of Wealth. But that won’t lead to lower gas prices.

“Gasoline prices aren’t buffered by U.S. production at all,” explains Matt. “Unlike raw crude, U.S. refiners can and do export gasoline. So if oil war breaks out, domestic producers will win… and so will domestic refiners like Valero (NYSE:VLO) and Tesoro Corp. (NYSE: TSO)… but you, the little guy, will lose out.”

That is, you’ll lose out if you don’t protect yourself. And you should do everything you can, because no one, not the government or U.S. energy producers, is going to do anything to keep domestic gas prices low. Want to know what to do?

Here’s your solution: The first thing you should do is simply get out of the way. Dump any company that depends on cheap oil to build or ship or stockpile their warehouses.

Sure… oil’s price movement could be different this time around, obviously. But you’re much better off getting ready before a historic moment… than you are trying to catch up after it’s happened.

After you’ve taken the necessary steps to get ahead of an Iraq shock, please read on for Byron King’s analysis on U.S. fracking. He explains why despite radical Islam and the Oil War, it’s your best hope for outsized returns…

The Islamic State of Iraq and Syria, or ISIS — a violent Islamic fundamentalist group — has been taking over Iraqi cities slowly but surely. So far, none of Iraq’s major oil production is in harm’s way… but that could soon change. Byron King details the situation and gives you his insight for how to prepare your portfolio ahead of this “Oil War”…

Thank God for Fracking

 

I’m sure you’ve seen the news. Radical Islamist armies are marching towards Baghdad, slicing through Iraqi government troops like a hot knife through butter.

Iraq is breaking apart. As if recent, U.S. policy fiascos in Libya, Egypt and Syria were not enough, the wheels are now coming off the proverbial bus in Iraq, site of so much blood and treasure spent in the last decade. Loss, loss and more loss.

Tragedy unfolds before us. U.S. policies across the Middle East are coming undone. In Washington, U.S. officials are panicking, and — characteristically — there’s talk of U.S. airstrikes against Islamists.

With that in mind, the Middle East “Oil Wars” scenario I’ve been outlining since 2007, is clearly playing out, very much along the Shiite-Sunni fault lines that I described here in the Daily Reckoning for the past several years.

At the same time, closer to home, the Age of Wealth scenario my partner Matt Insley and I have predicted is unfolding as well. U.S. oil prices are at their highest levels in well over a year. We live in a global oil market, and far distant events can drive prices upwards in the U.S. and Canada. For example, look at the chart for U.S. West Texas Intermediate (WTI) blend.

DR 06-16-14 Turmoil-580x470

Looking at the chart, not even the bitter cold and snow of this past North American winter moved oil prices up to where they are now. But the Middle East heating into turmoil? Well, that’s a camel from a different stable.

Meanwhile, share prices for energy-consuming industries — airlines and more — are down, on the prospect of higher fuel prices. On the other hand, domestic oils and oil service plays are up. Again, it all fits our energy investing thesis, which is to keep your net worth away from “too much” Middle East exposure.

Sooner or later, it’s all going down over there. As I watch what’s happening over there, I’m inclined to think it’ll happen sooner rather than later. But there’s good news.

The U.S. has entered its New Age of Wealth — which gives you an opportunity to invest and profit despite Middle Eastern mayhem.

Fracking — the key to the U.S. energy renaissance — is the culmination of decades’ worth of technology improvements in the energy biz. That is, just pressuring rock with fluids — classical “fracking” — has been around for nearly 70 years. But horizontal drilling now makes it possible to expose many thousands of feet of hydrocarbon-bearing rock to the magic of super-high pressure.

In the “olden days” of vertical drilling, the drill bit might penetrate 30, 50 or even 100 feet of “pay” rock.

In other words, in the “olden days” of vertical drilling, the drill bit might penetrate 30, 50 or even 100 feet of “pay” rock. That was good back then, but can’t cut it today.

Nope. Today, with geo-steering drill-bits, and very precise placement of the well bore within a formation, an operator can gain access to literally miles of exposed rock face, deep down. Then come the “stages” of fracking, which release the oil and gas. Yes, it’s complex technology, and not all that many companies can make it work.

When you step back, new technology includes better computers, software and algorithms. Better math, physics and geophysics. Better directional control. Better drill bits. Better drilling fluids. New power technology, such as “top drive” drilling systems. Better metallurgy for drill pipe, and even “coiled tube” drilling with metal that bends more easily than you might suspect. Better valves and pressure control. All that, and more.

We’ve covered it all — and even highlighted the companies that deliver this cutting-edge tech — like Halliburton, Schlumberger and Baker Hughes to name just a few. The U.S. has come a long way.

Remember back in 2005 or so? U.S. conventional oil output was heading down fast, in seemingly irreversible decline. Then the directional drilling and fracking revolution happened, in the sense that it began to kick into higher gear. By 2007, the oil industry was adopting the new tech at a fairly good clip. Since about 2008 — in the wake of the financial crash, as a matter of fact — U.S. oil output has soared.

DR 06-16-14 OilProduction-580x470

Indeed, since about 2008, U.S. oil output is up by over three million barrels per day, while output in the rest of the world has been flat or declining. So U.S. fracking has added significant daily oil output to world markets, equivalent to a fair-sized nation in, say, the Middle East.

Also consider that, in most other oil producing nations, internal demand is increasing; which means that amounts available for export are falling. So more and more U.S. oil is making up for less and less overall oil available on world markets.

Thus, in a world with less oil available for international trade, the U.S. is growing its output. And that’s why I say, “thank God for fracking,” which really means “thank God for new tech.” Without fracking — and the tech behind it — we’d be in a world of hurt.

Let’s return to the Middle East, which may still cause us a world of hurt because the place is collapsing before our eyes.

How bad will things become? Not long ago, for example at the Platts Conference in London, several speakers made favorable references to how Iraq would soon ramp up oil production and exports. This will serve to meet growing global oil demand, and moderate prices in years to come. Right?

Well, this week I saw imagery of Islamists chopping off the heads of captured Iraqi government soldiers. Thus, I began to discount that optimistic prediction by the speakers at Platts.

We live in a world that runs on oil. Much of that oil supply is at risk, due to the above-noted “Oil Wars” scenario.

Looking elsewhere, I’ve heard predictions that Libya will eventually get back to being a major world oil exporter. Then, at the Offshore Technology Conference in Houston last month, former Shell Oil CEO John Hoffmeister pointed out that Libyan rebels have managed to seize and hold Libya’s oil exporting terminals.

“Libyan forces possibly could retake those oil terminals,” noted Hoffmeister, “but to my understanding of chemistry, hydrocarbons don’t work well with exploding rocket grenades and tracer bullets.” In other words, if the Libyan troops attempt to retake the oil sites, Libya risks blowing up critical infrastructure, such that it will take years to rebuild, if that happens at all.

Here’s the bottom line. We live in a world that runs on oil. Much of that oil supply is at risk, due to the above-noted “Oil Wars” scenario. Here in theDaily Reckoning, I’ve discussed the situation for many years. I’ve focused investment ideas on investing “around” the looming storm, as much as that’s possible.

Still, here in the U.S. — and Canada, to be sure — our energy industries have developed technology to pull hydrocarbons out of seemingly impermeable rocks. It’s the right tech at the right time in history. Just in time, as things are turning out. We are blessed, if you care to look at it that way.

Perhaps some wonderful politician, somewhere, will stand before a teleprompter and give a fine speech. Perhaps that fine speech will move souls, to the point where peace and love breaks out, and the world enters a new era of harmony. That, and oil prices will fall. Perhaps; but don’t bet the ranch on it.

Instead, keep your eyes peeled for the furies of war. Unless you’re very elderly, you have NEVER seen the kind of carnage that’s about to sweep across entire swaths of the world. To use a different form of godly analogy, Mars wants to be paid — in gold, blood and oil. Invest accordingly… and keep your your eyes peeled on these pages — because we saw it all coming, years ago.

Regards,

Byron King
for The Daily Reckoning

P.S. “If the regional spillover results in a significant supply disruption in Iraq or elsewhere,” an analyst from one of Europe’s largest banks said, oil “could spike briefly to $150.”

But get this — my research says that prices could head much higher than $150. I guarantee you won’t hear a forecast like this in the mainstream, but I think it’s a lot closer to reality. Click here for my latest price target and information on the Middle East’s meltdown.

Click here to learn how to make 416% gains like this type of situation has returned in the past. You’ll never have to feel the pain at the pump again.

About Byron King

Byron King is the managing editor of Outstanding Investments and Energy & Scarcity Investor. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents.