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OPINION

Will Cheap Gas Hit the Road?

The opinions expressed by columnists are their own and do not necessarily represent the views of Townhall.com.

Since the OPEC agreement last week to curb production, we've seen gas prices climb every day. This, obviously, has many people concerned about how the deal will impact consumers, particularly as we head into a peak shopping season.

But before we get too concerned about higher gas prices or climbing oil stocks, let’s wait until Monday. This weekend, 15 non-OPEC countries and OPEC nations will meet in an attempt to figure out how all of this will impact them. And it is not out of the realm of possibility that by the end of the weekend, the entire production cutting deal will fall apart.

If that happens, of course, oil prices will begin to drop dramatically next week. Here’s the big question: Will gasoline prices drop too? Not likely. Keep in mind that the Donald Trump administration is set on a surge in oil production here in the U.S., using our energy resources to grow into and work with a stronger economy. This assumes, however, that we have a growing economy in the upcoming 12 months and take into consideration that it is very possible that we could see the Euro zone and parts of Asia worsening. This could have an impact on global demand for oil.

The United States is down about 1 million barrels of oil production per day over the last two years. The problem is that in order for this to new production to have a positive effect on oil companies, they must be able to afford extracting this oil from the ground, which is not likely at prices below $45 a barrel. One of the best American resources that could experience a surge is natural gas. Prices for natural gas on Monday hit a two-year high, and certainly this is long overdue and is desperately needed for the natural gas industry here in America to thrive.

Over the course of the next year, I believe we will see a separation from oil prices as they relate to gasoline prices at the pump. In other words, increasing oil prices might not impact gasoline prices quite as much as they do right now. The fact of the matter is there could still be some very volatile days ahead in the energy sector, and you may consider whether you have the stomach for an enormous amount of volatility over the next two years. If not, and if you’re profitable in some of your oil stocks, it may be a good time to take some of those profits and move on to other industrial and material stocks that in the long term have a positive outlook.

Many investors are holding out for that hundred-dollar-a-barrel oil again, when stock prices will skyrocket. But they may be holding out for a very long time, as it will take an enormous amount of industrial production, manufacturing and productivity to create enough demand to put that kind of pressure on supply. I don’t expect to see that kind of demand diminishing the supply anytime soon. And keep in mind that demand will have to be global. Certainly if the U.S economy begins to grow and thrive like we hope to see over the next three years, this will increase manufacturing and exports both in China, Japan and India.

Even if that demand picks up, it will be difficult to realize a situation where supply will not to be able to keep up. It may take serious geo-political events to interrupt the flow of oil for an extended period of time while maintaining real productivity. Unfortunately, in the world in which we live, that could happen at any moment, so it’s certainly not out of the realm of possibility. But I would say that with a Trump administration and peace through strength being a priority once again, hopefully that possibility is a lot less likely.

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