Remember those pre-gas crises price wars that would sometimes occur. Two gas stations on opposite corners would go toe-to-toe with each other in a gas war. It was fun to drive through those intersections every day, because each new day would bring a lower gas price. I image that post OPEC these gas wars do still occur, but not with the same frequency or ferocity as before. That is until the local gas war graduated to one of global dimensions. A worldwide gas war is now being fought between OPEC, or more specifically Saudi Arabia and North Dakota, by which I mean fracking. Fracking has greatly increased US oil production, given us greater energy independence then we have enjoyed in decades and lowered the global price of oil, albeit not without a serious environmental impact. All the while OPEC and other energy producers have continued to leave their spigots wide open. In just a few years crude oil prices have plummeted by a third and continue to freefall. When oil was running $100 per barrel, fracking was highly profitable, but fracking is expensive. It is estimated that this technique has a breakeven point of $75 a barrel. Prices are currently running $67. As in any gas war both sides suffer and eventually one side breaks. Either the frackers go from boom to bust or OPEC knuckles under. Not all members of OPEC are well positioned to weather this price war. So far, this war is all goodness to us consumers. We pay less at the pump, this nationally translates into a free $75B tax cut and for the first time in ten years economists are forecasting a 3% US GDP growth in 2015. Like WW II was to the Great Depression, this gas war maybe to the Great Recession. This time, no blood was spilled, just oil.
I have bet twice on oil and it looks like I’ll lose twice. In 2011, I bought a Prius when oil was high. That old adage, buy low, sell high, now comes to mind. I also bet on high gas prices with the Perma-Bear. Back in 2008, when the economy was tanking, he bet that gas would hit $2 a gallon and I bet that it would hit $5 first, here in Saint Louis. We each agreed that the loser would pay for a gallon of gas. Those 2.5:1 odds were just too tempting. A few years ago, when gas was flirting with $5, I had to remind him of our bet. He remembers it now though. Today, I filled up at $2.37 and another guy paid $2.25. A friend of a friend analyzes oil prices for the Air Force and predicts that gas in Saint Louis will hit $2 a gallon in a month. I fully intend to pay off my wager, but with quickly deflating gas prices, I wonder how quickly I should do that. In 2008, I was working daily with the Perma-Bear, now not so much. If I could duck him for a week or two, or even a month, would my debt fall from $2 to $1.75, or even $1.50? After all, I’m still making car payments.