This article was originally published in the April 2012 issue of the Elliott Wave Theorist.
Elliott wave analysts extrapolate a fractal form. Most other futurists extrapolate straight lines. Linear extrapolation makes most people convinced of the continuation of a social trend when it is in fact at an extreme. To a socionomist, a consensus of opinion coupled with evidence of widespread linear extrapolation is a reason to suspect a trend extreme, and therefore a turn, is at hand. Of course, financial analysis is probabilistic, so it is not impossible that gasoline prices will soar. But the evidence seems stronger that they won't.
Oil prices peaked in 2008. That was the end of a great Elliott wave of Cycle degree, and it also arguably ended a multi-decade price advance of Supercycle degree (see charts, March 2009 issue).
The dollar price of oil crashed by 78% in 2008. That was wave a of a great bear market. Oil prices recovered in an A-B-C pattern into April 2011. That was the top of wave b. So, not only is oil four years past its terminal high, but it is also a year past its secondary high.
You wouldn't know it from media reports. In recent weeks, pundits have been vying for the title of wildest prediction for peak gasoline prices. Articles have quoted predictions of $4 a gallon, $5 a gallon, $6 a gallon, $7 a gallon and $8 a gallon. Read these articles and you will get a feel for the progression:
Experts predict gas to be $4.25 by April
(Associated Press) February 19, 2012
Gasoline prices have never been higher this time of the year. The national average for gasoline as 2012 began was $3.28 a gallon. The average price for February so far is $3.49 a gallon. The Oil Price Information Service predicts gasoline could peak at $4.25 a gallon by the end of April. That would top the record of $4.11 in July 2008.
Gas prices may top $4.50 by summer
(Atlanta Journal-Constitution) February 20, 2012
Gas prices are likely to hit an all-time high this summer, fuel experts said Monday. Georgians are already paying their highest-ever February prices -- $3.51 a gallon, on average -- a number that could soar past $4.50 by summer, some analysts said. "You're going to be looking at probably $4 a gallon by springtime; probably $4.50 by summer," Embry said. "If they go to war it will get higher than that."
Most ever could get hit by $5 gasoline
(USA Today) February 24, 2012
More drivers than ever could soon be paying $5 for a gallon of gasoline.
[February 24: closing high for oil]
Oil prices increase to near highs
(Associated Press) February 25, 2012
...investors are snapping up oil contracts in case fighting breaks out in the heart of one of the world's biggest oil-producing regions. "Everyone's pricing in the potential for war now," independent analyst Stephen Schork said. "Without a concrete resolution, nobody knows how high this can go." It looks like they'll keep climbing.
[March 1: intraday high for oil]
Stumped at the Pump. Demand for gas has fallen, yet prices keep rising.
(Time Magazine) March 19, 2012 (p.12)
...in the long term, global demand for oil will increase, driven by developing countries. Which means that someday soon, $4 gas is going to look cheap.
Oil Prices at $200 a Barrel? Some Think It's Coming
(Market Insider) March 21, 2012
Signs that crude futures may hit much higher levels are converging, say oil traders and analysts, some of whom predict that Brent [LCOCV1 124.40 -0.46 (-0.37%)] crude could reach $200 a barrel within the next 12 months. The biggest issue, they say, is that global crude supply remains uncommonly tight -- a scenario that's unlikely to be alleviated any time soon.
Energy experts say gas could hit $8 if Iran closes strait
(USA Today) March 23, 2012
Gas prices could double if Iran acts to close the Strait of Hormuz to oil-tanker traffic near the beginning of next year, cutting global economic growth by more than 25%, a leading energy-consulting firm says. Brent crude oil prices could briefly hit $240 a barrel in the first quarter of 2013, said Sara Johnson, senior research director for Global Economics at HIS Global Insight. Brent, the benchmark European oil, which IHS uses as a proxy for global prices, closed at $123.07 in London Thursday. In the U.S., West Texas Intermediate, the benchmark U.S. crude oil, closed at $105.35 a barrel. "If it did hit $240, you're looking at about a doubling of where gas prices are now," said Jim Burkhard, managing director of the global oil group at IHS CERA, the firm's energy-research arm. "And the U.S. is at $4." The firm's analysis assumes the strait would be closed at the start of 2013.
Gas Prices Expected To Continue Rising This Spring
(WJZ) March 26, 2012 5:08 PM
"It's just too much," said Harold Walter, driver. Despite these outrageously high prices, AAA has even more bad news. They say the summer months mean another spike. AAA says April is when the East Coast switches from winter fuel blends to the more expensive summer fuel blends. And for drivers that means topping off already abnormally high prices. "What we're about to see, the increases will just make it even worse but these are typical increase we would see seasonal," said Ragina Averella, AAA spokeswoman. Experts expect prices to jump 10 to 20 cents over the next few weeks before spiking in mid-May at around a record-breaking $4.25 a gallon. "I actually expect it to go high," Walter said. "I think $4.50 to $4.70 a gallon isn't impossible."
Gasoline prices about to pinch
(Atlanta Journal-Constitution) March 31, 2012
Gas prices are still rising, and the pinch will get worse, said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University. "As we come into a warm summer -- even a normal summer -- once the air conditioner comes on, there will be no relief for the pocketbook," Dhawan said. "And if it's a hot summer, we will feel it even more." It probably means regular gasoline will rise to an average of about $4.20 a gallon during the next few months in metro Atlanta -- 20 cents above last year's crest, according to AAA, the national auto organization.
T. Boone Pickens: Oil Could Hit $148 Per Barrel
(CNBC.com) April 3, 2012
Tightening oil production worldwide could mean prices hitting $148 per barrel this summer, Texas billionaire investor T. Boone Pickens said Tuesday.
Time magazine uses "global demand for oil in the long term" as its reason for long-soaring prices. Demand for oil has gone up a million-fold over the past century, yet the real price of oil is about the same as it was at the start. People forget that price derives from supply and demand.
The only reason the nominal price of oil went higher for decades is inflation, and, at the end, a rush of speculation. Because of that history, some writers say that oil will go to the moon simply because of endless inflation. At least that argument is cogent. But the true looming threat is deflation, and I think falling oil prices will be one of its results.
But to writers today, there is simply no question about it: Prices are going up. Figure 1 shows the timing of the mad rush to extrapolate the price of gasoline far upward. As you can see by the arrows, most of it has come in the face of flagging oil prices, in the weeks after the daily closing high for oil on February 24.
The rush to extrapolate is all we need to conclude that the odds of oil and gasoline prices going to the moon are extremely low. Yet we also have Elliott wave analysis. Oil has been one of our best markets, as detailed in the July 25, 2006 issue of The Elliott Wave Theorist. We were right there for the two recent tops, too. The May 2011 issue reviewed the history and labeled the top of wave b two weeks after it occurred. On March 2 of this year, EWFF made the case for a near-term peak. The next phase of wave c down is underway.
As demonstrated in Figure 12-3 of Conquer the Crash, retail prices lag wholesale prices. If there is any leading indicator of the price of gasoline, it is the price of oil (see Figure 2). At this point nothing mysterious or exceptional is going on in prices. But the mental activity related to them is exceptional.
Most economists think higher oil prices are detrimental to the economy. Yet oil fell during the crisis and has risen throughout the three-year recovery! The AJC (3/31) reported a typical economist's view: "While higher gas prices won't kill the recovery, it sure won't help. It will dent growth a little. [It] will be bad news for corporate investment and job growth." Countless political writers, including cartoonists, have similarly been saying that rising gasoline prices will reduce President Obama's chances for reelection. Both of these fears are entirely backwards. Oil has been moving up and down with the stock market. Rising financial markets mean that the credit supply is reflating. Reflation is possible only when social mood is trending toward the positive, and a positive trend in social mood helps both economic growth and Obama's chances for reelection. This is why the economy has recovered as oil prices have risen. This is why the latter-day peak in Obama's popularity occurred in May 2011, within days of the highest prices in both oil and the NYSE Composite index. Economists and Obama's handlers should fear falling oil prices, not rising ones. But they rely on logicians using false premises, so they get the whole picture wrong. Obama is so worked up over predictions for soaring gasoline that he plans to disrupt the market for it! My friend Jean-Pierre Louvet in the latest SafeWealth Report summed up the monumental errors involved in this initiative:
Feeling under pressure to take action due to rising gasoline prices, earlier today, the U.S. administration concluded that it wanted Congress to strengthen supervision of the gasoline and presumably the crude oil markets. As a result, the Administration is proposing to increase penalties for "market manipulations." The Administration also wants to empower U.S. regulators to increase the amount of money traders are required to put behind their transactions, i.e., raise margins. (Source: CNBC.com)
To start, this proposal is budgeted to cost $52 million to the U.S. taxpayer; in our view all very needlessly. Put differently, if the U.S.' Futures Trading Commission wishes to raise gasoline/oil trading margins, it already has the full power to do so at no cost to the U.S. taxpayer. (Who's getting the pork?)
This type of proposal demonstrates how poorly politicians of all ilks and nationalities understand markets. What the U.S. Administration's proposal will do is first and foremost to dramatically reduce market liquidity and thus risk causing a higher price level than what could otherwise be the case.
Moreover, and this is the key point: If the Administration believes that gasoline prices are too high, it should recall what helped push these prices higher, namely the fact that policies such as QE I, QE II, QE III plus other easy monetary policies launched by the Fed have created oceans of debt liquidity which the Fed now wants to see -- if covertly -- used in markets in order to regenerate wealth to supposedly better assist in the U.S. economic recovery. Talk about the blind man leading a group of blind people!
Finally, in 2008, the crude oil market rose to $148. It then fell to $32. None of that price action was linked to massive government-dictated margins. Put differently, free markets know how to regulate themselves via pricing far better than governments ever will via regulations.
Politicians are always destructive, but they are rarely so ignorant as to be short-run self-destructive, and that's how Obama's policy should be labeled.
Finance is not the only setting here. Economics also plays a role. Remember the last time oil fever was breaking thermometers? I wrote this in the July 25, 2006 EWT:
The Economic Factor
The "Peak Oil" bulls never tire of listing economic forces that will cause oil to go up for decades and centuries. Never mind that we did not hear about this when oil was $10 a barrel; now it's fashionable. But there is a far more fundamental aspect of economics that the bulls are ignoring. When a resource becomes scarce and expensive, do people bid it up to infinity and then revert to the Stone Age? No. Why not? High prices provide incentives. Free markets always offer alternatives.
Today, economic forces are coming to the rescue in ways that no one anticipated in 2008. Fred Singer, professor emeritus at the University of Virginia, wrote this editorial for American Thinker:
April 11, 2012
Cheap Natural Gas Heralds an Energy Revolution
By S. Fred Singer [excerpt only]
All bets are off for the future of energy in the United States and, indeed, the world, as the price of natural gas plummets to ever-lower values -- thanks to the development of technology that can access gas and liquids trapped in hitherto inaccessible shale rocks. In mid-2008, the spot price (at Henry Hub) reached a peak of $13 per mcf (1,000 cubic feet). Since then, the price has decreased sharply, dipping to $2 in mid-March, and it now stands at $2.30. If prices decline further, natural gas will be cheaper than the average steam coal, which up until now has been the lowest-cost fuel on a heat basis.
...consider the consequences of having huge quantities of cheap gas available. It will make new coal-fired power plants uneconomic, but it will also make new nuclear plants uneconomic. It is ironic that these two longed-for goals of radical environmentalists are being achieved simply through economics, without the need for any regulation. But it is ironic also that cheap gas will completely remove the need for electricity generated by solar or wind -- much to the chagrin of environmental zealots. And all those folks hoping that energy prices would continue to rise and that electricity costs would "skyrocket" will be sorely disappointed.
But there are also extra bonus points. "Combined-cycle" gas power plants can reach efficiencies of 60% or more, compared to heat efficiencies of nuclear power plants of 35% or coal plants of 40%. It gets even better than that. Gas-fired electricity generation is essentially non-polluting and user-friendly, and it can be placed in close proximity to wherever power is needed, making distributed generation economically feasible. For example, a large apartment building of 1,000 units could use its own 10-megawatt power plant. But once installed, it becomes possible to consider co-generation, with the waste heat used for space heating, air-conditioning, hot water, laundry, and other process-heat applications -- and even desalination. One can imagine energy efficiencies of as much as 80%, more than double what is achieved today. It would also simplify the problem of waste-heat disposal.
This leaves only transportation as a major energy consumer that needs to be addressed. On an interim basis, one might use liquefied natural gas (LNG) to fuel trucks, earth-movers, and perhaps even trains and aircraft. Intermediate-sized users, such as fleet vehicles, (SUV-sized) taxi cabs, buses, etc. could benefit economically by using compressed natural gas (CNG) -- with fuel costs only a fraction of conventional motor fuels.
But the ultimate solution for the majority of vehicles is still gasoline and diesel oil. And with natural gas prices really low, there is no longer an incentive to aim for highest conversion efficiency. Therefore, there is no need to think about ethanol, methanol, or exotic liquids like hydrogen, all of which would require a new distribution system and major adjustments to car engines. Instead, one can simply adapt existing commercial technologies, like Fischer-Tropsch, to convert natural gas directly into gasoline or diesel.
Even today's gas price is low enough -- about 15% on a BTU-basis -- to yield a substantial profit for conversion projects. No wonder that major GTL (gas-to-liquid) projects are planned or already underway in Qatar and other locations. It would seem to be a "no-brainer" investment -- with no need for government subsidies or loan guarantees.
As Singer adds over several paragraphs -- and as I cautioned six years ago -- the only risk to a good outcome is restrictive government policies.
The highest national average price for gasoline this year so far is $3.92 per gallon, reached last week. It would be ironic if gas never even reached the lowest upside prediction. On April 11, USA Today bucked the trend in quoting three industry analysts who do not believe the consensus. Good for them.