George S. May Business Blog

Don’t Believe The Hype – Cheap Gas Isn’t All Good

Autumn is upon us and, unfortunately, the leaves are not the only things falling. Afghanistan targets have endured a record number of bombs this year, doubling that of all of 2006 halfway into 2008. We saw Guns Roses’ credibility plummet with the release of their mediocre attempt to resurface: “Chinese Democracy”. Samuel L.’s career tends to be on a constant decline… Am I forgetting something?

Oh yeah, there’s that market of ours too.

However, with all things falling, there does seem to be one article in decline that will shine some light on these dark financial times of ours: the price of gas! Well, sort of.

Unless you’ve been shacking up with the unabomber in the woods of Lincoln, Montana, you have realized that gas is down in astronomical numbers over the past four months. Starting in July, and in my opinion in conjunction the strengthening of our dollar, oil began a downward skid that dropped the price of a barrel from $147 per barrel in June to somewhere around $100 into September. Then, as we had our mid-September credit crunch and market meltdown, the demand weakness for oil became all the more evident and prices tumbled even further south into the $70 dollar range. As if everybody finally woke up and said “hey, you know what, it seems like the world is entering a recession!”

So, now that oil drilling companies have gotten hip to the economy, gas prices are going to stay down and it’s time to start spending our money! WRONG!

Although it hurts for the average consumer like you and I to say, oil service companies are all but recession proof. See with oil, just because we are buying less, does not mean that they are drilling less. A majority of oil company capital budgets are written some years ahead, so even with wide swings in the price of gasoline, (or whatever macroeconomic situation for that matter), oil companies still have work.

In fact, they have no choice but to work. Let me explain.

An oil company negotiates lease on a certain drilling area. If they do not drill that area within a certain amount of time, the lease expires and they won’t realize the full potential of that area. In addition, the rig they are using is generally under contract. So they have to drill before the contract expires and the rig moves. Or, and this is really not to far of a stretch, there is always the possibility of some environmental group finding a problem with the area they are drilling and suddenly an immediate major work over must be done. So, as a result, as long as they are able to, these companies will be drilling. If the oil demand is down, well then, that just means inventories are building back up.

So my advice is this, be like the oil companies. As you begin to spend less on gas, you will, obviously, find extra cash in your pocket. Do not go out and blow that extra money, rather accumulate a position where you can watch how this changing economy unfolds. Trust me, stronger oil prices will arrive again

And probably sooner than later.

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