How High Will Gasoline Prices Go?

The high price of gasoline is one of the biggest concerns of Americans today.

Everyone wants to know whether the price will decline, stay up here at $4 a gallon, or climb higher.

Well, at Cabot, our very successful growth stock investing system works because we DON’T try to predict the future.  Instead, we simply observe trends and invest on the expectation that they will continue.

So for me, the simplest attitude is to say, the trend is up; it’ll probably continue.

But I have some of my own thoughts on the issue, so today I’m going to do a little speculating on the future price of gasoline, and the possible effects of those prices.  A lot of what I predict will likely be wrong, but if I can get you thinking about things that MIGHT happen, I think you’ll be able to prepare for change, and position your portfolio to benefit from it.

In the end, I’ll give you an investment idea.

Gasoline Uptrend

So here goes.  For starters the “obvious” causes of the high price of gasoline are growing demand from China and India combined with an inability of the petroleum industry to increase production at an equivalent rate.

Another part of the equation, impossible to measure, is the effect of speculators, who amplify the trend by buying futures, which have the effect of making fuel appear scarce in the future as well.  What they do is generally legal, though an investigation now being conducted by the Commodity Futures Trading Commission may find some illegal activity.  Time will tell.

These trends, of course, can continue, and they have the potential to drive gasoline prices much higher.   But I’m betting that in the short-term, gasoline prices have reached a plateau.  I think that public perception of the problem is now at a fever pitch, as illustrated by the primacy of the issue in consumers’ minds, and the recent stories about the plummeting sales of trucks and SUVs.  And I think that the charts, as well, show a need for a cooling-off period.

One clear result of the recent high prices has been a marked increase in the use of public transit by those with access to it, and a general reduction in driving activity by others.  Small cars like the Honda Fit, which gets 34 miles to a gallon on the highway, are selling like hotcakes.  The actual effect of these changes in consumer behavior is unknown, but the perception that demand is falling is in the air, and that perception is likely to influence gasoline prices in the short run.

In the long run, however, I think the price of gasoline will continue higher.  Yes, new drilling will open up new fields, but only because those fields would have been money-losers with gasoline at $3 a gallon or below.  The producers drilling new wells today are counting on continued high prices.

Peak Oil

And then there’s the matter of Peak Oil, which I examined back in April (see our online archive: ).  The basic theory says that someday, the earth being in effect a finite reservoir, the amount of oil that we are able to extract per day will begin to decrease.

That fact is unarguable.  The only question concerns the timing.  What I’ve read leads me to believe we are nearly there.  Yet the concept of Peak Oil remains alien to most Americans.  In fact, I recently asked a number of smart people if they were aware of the concept of Peak Oil.  Every single one said no.

So maybe I’m wrong.  But I’ve learned that problems come from where they’re least expected, and because no one is talking about Peak Oil, despite some serious independent research that supports it, I’m worried.

So, my bet is that after a pause, even a retreat, oil prices will continue to rise.  And the ramifications will be huge.

People will drive even less.  People will fly less too, as airlines increase their prices to account for the cost of fuel.  The skies will become less crowded.  Gas-guzzling trucks and SUVs will slowly fade from our highways.  More fuel-efficient but slower transportation systems will gain favor, including railroads and ships.  Toyota Priuses, Mini Coopers and Smart Cars will rule the road.

Heating the house will bring an increasing burden, escalating flight from the northern latitudes.  McMansions will house multiple families.  And houses in general will shrink.

On the bright side, however, the demand for alternative energy sources will foster wonderful new inventions that will, in time, fill much of the demand for energy.  Solar power and wind power are the most attractive contenders today, and I’ve recommended stocks in these sectors previously.  I also think we’ll see breakthroughs in battery technology, which will be terrific for hybrid and plug-in cars.

But you can’t fly an airplane on solar power or wind power or battery power, so the airline industry, more than any other, appears to be the one that will have to cope with major cost increases.

Now, some analysts have projected that a lack of energy will bring massive failure of our electric grid, with attendant catastrophes, including the loss of power to water-pumping and sewer-pumping stations.

But I’m an optimist.  I believe that the ingenuity of mankind, stimulated by the need for new power, will deliver a solution as it always has.  The transition will no doubt be disruptive, but it will include new opportunities for people who are good adapters, and one of my jobs is to help identify those profit-making opportunities.

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Wind Power Stocks

Solar Power is the leading candidate for delivering a major portion of our energy needs in the years (decades, centuries) ahead, and I’ve written about several companies in the industry, both American and Chinese, in the past year.  But there’s also great progress happening in the field of wind power.

Early on, there were few pure-play wind power investments; General Electric (NYSE: GE) is in the wind business, but its work there hardly makes a dent in the company’s results.  Now, however, the investment opportunities in new companies are becoming clearer, and one of them is American Superconductor (NSDQ: AMSC).

Last month, in fact, American Superconductor was featured in Cabot Green Investor, and here’s what editor Brendan Coffey wrote:

“Electricity generated from wind had a boom year in the United States in 2007: more than 5,200 megawatts of new installations went live last year, 30% of all new power generation. Amazingly, the new installations increased the amount of wind generation in the country by 45%. Wind energy now provides just 1% of the total electricity needs of the U.S.

The expansion of wind power is moving companies from research and development plays into true commercial enterprises. One of these is American Superconductor, a Massachusetts designer and builder of wind turbines and systems to connect turbines to the grid.

Originally founded to develop highly conductive wiring for power systems, American Superconductor transformed itself into a wind energy powerhouse with the acquisition of Austrian firm Windtec in early 2007.

The Windtec division designs wind turbines that other companies incorporate into the wind towers they build on behalf of wind farm customers. Essentially, other companies are using the Windtec design as their product. Thanks to a clause in the purchase agreements, American Superconductor has the right to sell the electrical components for each turbine built, something other wind turbine designers don’t require. The arrangement is a lot like razors–you buy the razor itself, but then you have to buy the blades repeatedly in order to be able to use it. As Gillette found out many years ago, there’s money to be made in selling the razor, but much better profits to be found in the blades. For American Superconductor, the arrangement is proving to be unexpectedly profitable.

One design the company sold two years ago to China’s Sinovel has generated 2,000 additional orders for electrical components, for a total of $140 million in sales. Sinovel, now China’s largest wind turbine company, is aiming to add 1,000 new systems a year which, if it comes to pass, will represent a significant boost to American Superconductor’s bottom line. Given the emphasis in China on developing renewable energy resources, there is little reason to expect otherwise.

Overall, the company is focusing growth in two regions–North America and China. In the U.S., utilities are expected to double their wind power spending this year, driven by a federal production tax credit of 2 cents per kilowatt-hour. China is expected to ramp up even faster; by 2020, China wants to increase its wind energy capacity more than 13-fold to 80 gigawatts. By 2030, companies in China are expected to spend $1.5 trillion in wind power systems. To tap that market, the company formed AMSC China late last year to prospect for new business and to manufacture power modules in that country.

The company anticipates becoming cash flow positive for fiscal 2008 on revenues around $150 million.

Company executives estimate it will take sales of $225 million to reach the point of per-share profitability.”

Back when that was first published the stock was trading at 26, and soon after, terrific first quarter results (and prospects for further rapid growth) sent the stock soaring in one day from 26 to 33.  In recent days it’s been trading in a narrow range between 34 and 36, so the uptrend is still intact, but a pullback to 30 would not be unusual.

Editor’s Note: You can get regular advice on investing in American Superconductor and other Green companies by subscribing to Cabot Green Investor, which uses the same time-tested investing techniques as our flagship, Cabot Market Letter, while focusing on the Green sector. Since it was launched at the start of 2008, subscribers have enjoyed growing profits in companies such as Clean Harbors (NSDQ: CLHB) and more … and that’s just the beginning.  To start your own no-risk trial subscription, simply click the link below.

Yours in pursuit of wisdom and wealth,

Timothy Lutts

Cabot Wealth Advisory


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