Cheap oil: Don't count on it

It's dangerous to buy gas guzzlers just because oil is cheap right now. Most pundits predict eventual major hikes in this, our most volatile commodity.

Wed, Dec 31 2008 at 3:06 PM EST

SUVs are moving again.

I’m amazed at people who make car-buying decisions based on temporary fluctuations in the price of oil. But it’s almost Pavlovian: Prices hit $4 a gallon, and consumers suddenly get interested in fuel-efficiency. But when those prices (currently at $1.67 a gallon) drop again, they rush back to SUVs and pickups. A few months ago, passenger cars were outselling light trucks, but now they’re back up to 51 percent of the market.

Folks, this is short-sighted. The low prices are the result of the recession and a drop in oil demand. But most commentators—and they car companies’ own analysts—expect them to go up again when demand increases. GM told me this was its operating assumption going forward. If peak oil is really either here or around the bend, we could get nostalgic about $4 a gallon gasoline.

Another factor is OPEC’s maneuvering. The consortium, with Russian cooperation, has taken action to take 2.6 million barrels of oil a day out of production. Two million barrels are just from OPEC, it’s largest production slowdown ever.

Figuring out what will happen with oil is a lot like playing chess. The production cut probably will raise prices, but on the other hand there might be even less demand for high-priced oil, so prices could also fall even further.

In the long run, bet on expensive oil. And remember that a car or truck is a five-year investment for most people. If prices do go up, not only will your gas guzzler give you pain at the pumps, but its resale value will take a big hit. In other words, small (and fuel efficient) is still beautiful.

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