Royal Dutch Shell plc (ADR) (RDS.A), BP plc (ADR) (BP): We’re Closer to $5 Gas Than You Think

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There are several reasons to be optimistic about America’s energy prospects: Oil and gas production is climbing, alternative energy use is skyrocketing, and efficiency gains are giving us more bang for our buck. Yet despite all this good news on U.S. shores, we cannot forget that the U.S. is only one piece of the global energy puzzle. There are a lot of signs around the world that $5 gas is very possible, and more likely than many of us would like to think.

Royal Dutch Shell plc (ADR) (NYSE:RDS-A)

Demand is falling… here
The demand for oil across the U.S. and Europe has been either flat or declining for the past decade, and demand for oil from OECD countries is less than it was 15 years ago. Certainly these kinds of numbers should be encouraging, right?

Source: U.S. Energy Information Administration, author’s calculations

The only problem is, it only tells half the story.

Source: U.S. Energy Information Administration, authors calculations

Based on projections, next year it will be less than half the story.

By 2014, the petroleum demand of countries not in the OECD is expected to surpass that of OECD members, and is expected to be double that of OECD countries by 2030, according to the International Association for Energy Economics. The world will still struggle to keep up with petroleum demand, and the costs to find these new sources will constantly go up because the costs to extract these new sources is much higher than what we were used to.

Between 2011 and 2012, the average reserve replacement cost for the top 50 exploration and production companies listed on U.S. exchanges nearly doubled to $32.72 per barrel. Even worse, integrated majors Royal Dutch Shell plc (ADR) (NYSE:RDS.A) and BP plc (ADR) (NYSE:BP) saw reserve replacement costs balloon to $41.76 and $72.03 per barrel, respectively. Companies like these two are big players in the global marketplace and their actions can have major implications on global markets. When costs get so high, prices will follow suit because companies will need to recover their costs.

The oil market is still pretty inelastic
I cannot deny that the appeal of alternatives to gasoline vehicles is getting stronger everyday, but we need to keep this in context. While many people may be more aggressive in pursuing an alternative to gas as prices climb, the infrastructure to make that a reality just isn’t in place for it to happen yet.

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