More concerning for oil companies should be the wild success Tesla Motors Inc (NASDAQ:TSLA) has had selling electric cars. Tesla Motors Inc (NASDAQ:TSLA) won’t electrify the entire auto fleet overnight, but it’s now proved that EVs can be a success, something that was a pipe dream just a few years ago. Chevy and Nissan have given EVs a go with little success, but Ford Motor Company (NYSE:F) has a decent car on its hand with the Ford Focus Electric. Mercedes and Toyota Motor Corporation (ADR) (NYSE:TM) are also trying their hand at electric vehicles, and they’re calling on Tesla to design the drive train.
An electric vehicle may not make sense today, with gas averaging $3.64 nationally, but if it jumped to anywhere near $5, you can bet millions of people would consider going electric. Long term, as technology improves, EVs will continue to take share, reducing oil demand and providing an alternative that puts a cap on how high gas prices can go.
Supply can turn at at the drop of a hat
When OPEC commanded the world’s oil market and prices were inelastic, it could control supply and prices as well. But the oil-supply business is no longer the monopoly it once was, with ultra-deepwater offshore drilling growing and fracking expanding in the U.S. and abroad.
What has become more elastic than demand for oil is the supply. When oil flirts with $100 per barrel, companies scramble to drill more wells, and when it falls, they cut down on capital spending. Fracking can cost $70 per barrel just to produce oil, so supply shuts off if prices get too low. But the reverse is true, and when demand goes up, supply suddenly hits the market.
We can take drilling in North Dakota as a proxy for this phenomenon. When oil fell below $40 per barrel in early 2009, the number of rigs drilling fell off the map. As the price rose from 2009 to 2012, the number of rigs grew, and now that the price of oil has begun trending slowly downward, so has the number of rigs in action.
North Dakota Inland Rotary Rigs data by YCharts
Of course, increased drilling in North Dakota does have its side effects. Regional price spikes are getting worse, and depending on where you live, you may be thinking that gas-price relief hasn’t hit your pocketbook. The Midwest and California have seen unusually high gas prices this year, but that’s largely driven by regional refinery outages and a lack of infrastructure to get oil from new wells to refineries. But overall, gas prices nationally have been flat for about two years.
US Retail Gas Price data by YCharts
Foolish bottom line
When we look at the national and global picture, there’s beginning to be a lot of downward pressure on oil and gasoline prices. Lower demand, increased supply, and alternatives from other energy sources are just a few of those factors. We have yet to hit $5 per gallon of gasoline nationally, and with the macro trends I’m seeing, I don’t think we ever will.
The article Why Gas Will Never Hit $5 a Gallon originally appeared on Fool.com.
Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Clean Energy Fuels, Tesla Motors, and Westport Innovations and owns shares of Tesla Motors and Westport Innovations.
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