$4 Gas: Bubble or Baseline?

"220! 220!” an RV driver cried out, reading the dollar ticker on a gas pump in Arizona in disbelief. In many places around the U.S., you cannot find gasoline for less than $3.99 a gallon.

The Department of Energy says there is a 25% chance that gas prices will be higher in the summer driving season. It has also increased its 2011 oil price projection from $91 a barrel to $105.

The fact is, however, that practitioners in the energy business have a hard time understanding just how the future will unfold because of the complexity of energy markets. As Reuters Analyst John Kemp expressed in a recent opinion piece, "Policymakers and some commentators continue to display worrying ignorance about how futures prices are formed and what they imply…Like the White House and many private forecasters, the IMF is sanguine because it expects the spike to be temporary and prices to stabilise around current levels….” (Note: Kemp will be taking part in a national webcast with AltaTerra analysts on the theme of untangling energy market myths and realities.) 

An even more ominous tone was struck by John B. Hess, CEO of the Hess Corporation, looking further into the future: "An energy crisis is coming, likely to be triggered by oil…. As demand grows in the next decade, we will not have the oil production capacity we will need to meet demand… and prices will skyrocket….” 

Forecasts are confounded by the headlines in the news this week. Turmoil in Libya and Saudi Arabia concerns governments and large companies around the world. As a result of nuclear reactor damage in Japan, concerns about nuclear power are being raised again in Japan and the U.S. How will the unfolding of these events affect long-term power plant development plans? 

Ten years is a long time for most businesses. Right now an important counterbalance to the price of oil and gasoline is the relative stability of natural gas and coal prices. 

Nonetheless, no matter your view on the more extreme predictions, energy prices are trending upward. They will almost certainly continue to rise—steadily and with some shocks—no matter what the time frame. It is also safe to say that the environmental performance of most organizations is closely tied to their energy sources and uses, and that environmental performance is increasingly monitored. 

This potential price increase means that, in many companies and large organizations, efforts to procure alternative energy sources will get bumped up in priority. Even though what it costs consumers to fill their tanks has very little to do with keeping most non-transportation related businesses running, $4 per gallon gas fires the imagination.   

Large and small organizations are already engaged in energy initiatives. Many institutions and local governments, most of the Fortune 1000, and nearly all of the U.S. military are actively seeking and implementing alternatives. They are gathering baseline cost and emissions data, increasing their energy efficiency efforts, buying Renewable Energy Credits, and preparing for or implementing new sources of cleaner energy generation on their premises.   

The motivations vary. Without a doubt, one of the main issues is cost savings. Corporate and institutional energy costs are rising, along with energy costs for all other sectors. Another part of the picture is brand image. Many organizations are pursuing energy initiatives to maintain a positive brand image, as stakeholder demand for energy solutions with environmental benefits rises. Other corporations are motivated by current regulation affecting their European operations (or U.S. operations if they are heavy emitters), whereas others are preparing for pending regulation. Many military and corporate energy managers are also starting to recognize the strategic value in diversifying their exposure to energy sources. 

This latest spike in gas prices – however long it sustains – will surely be a major factor in boosting investment in clean energy this year. Perhaps it will even get federal lawmakers to act.