Will We Soon Return To $4/Gallon Gas?

Filed in International by on June 1, 2009

Matt Yglesias has a question:

What I can see is the present, where markets react to any sign of good economic news with a big jump in oil prices. And the news in question is of the “things aren’t getting bad quite as quickly as we feared” genre of good news. What if six months ago, the economy is actually growing?

That’s an excellent question. Probably the only good side effect of the current recession has been the easing of gas prices in the short-term. There’s definitely been some disagreement about the cause – were the high prices due to speculation or because of demand? Was there an oil mini-bubble? Were we entering into a peak oil era?

The IEA is pointing to supply. The problem comes from a lack of investment in new oil fields combined with low productivity of existing oilfield combined with increasing demand. Yes, demand is still increasing, though at a slower rate because of the economic slowdown. From The Telegraph:

Ever since the bottom dropped out of the economy — and the oil market — last fall, there has been a single-minded focus on the weekly demand numbers released by the various energy agencies around the world. The conclusion drawn was that oil prices were going to remain weak for the foreseeable future because of the huge drop in consumption.

This, despite other compelling information that has long determined the decline rates of existing fields, even with steady demand, is going to push the world toward an oil shortage.

Now, all of a sudden, the tide has turned and the focus is on the supply side.

This analysis also point out the currency issue with oil prices. Since oil is priced in USD, the weakening of the USD has a large effect on the price as well.

The Calgary Herald also predicts higher prices in the near term.

But the real cause for concern is the supply side. Amid a lack of finance, large crude exporters such as Saudi Arabia, UAE and Russia have indeed put major drilling projects “under review”.

The number of oil and natural gas rigs operating around the world dropped 11pc in April alone. Having fallen for seven months in a row, this “rig count” is now down 42pc since September as energy companies’ credit lines have been cut.

The International Energy Agency, the Western oil watchdog, has just acknowledged that spending on oil exploration and future production will drop 20pc this year, double its earlier decline forecast.

On top of that, global oil markets are growing ever more concerned at mounting evidence the world’s largest fields are now seriously depleting.

These developments are setting up a “vertical supply curve” – where, as the global economy recovers, just a small demand increase could cause a shocking price jump.

A return of high gas prices could send the economy back into recession. It’s now more important than ever to invest in alternative forms of energy. It’s a twofer: it will help our economy and it will position us as technology leaders for the future.

If you’re interested in issues of oil and energy, I highly recommend the blog The Oil Drum.

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Opinionated chemist, troublemaker, blogger on national and Delaware politics.

Comments (14)

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  1. Perry says:

    I think we have to face the fact that high oil prices will happen, it’s just a question of when.

    For one thing, when at peak production several years ago, demand exceeded supply, this being a major factor in the $140 per barrel oil prices, $4 gasoline prices, etc.

    Do we want to enrich the off-shore oil producing nations, or do we want to find a way to accelerate our transition to non-fossil fuel alternatives?

    Moreover, and very importantly, needed restraints on fossil fuel use are required to slow down global warming.

    Although there will be a lot of screaming at first, I favor setting gasoline prices, for example, at $4 per gallon, and pocketing the difference in the form of a floating gasoline tax maintaining the total price at $4. The tax could then be earmarked for alternative energy technology and conversions from fossil fuels, like subsidizing home owners who convert to solar or wind generation of electricity.

    The market would then respond to decreased demand for fossil fuels by lowering home heating fuel prices and electricity generation prices in the interim during our transition to alternate fuels.

    This is a win-win strategy long term, in my view.

  2. meatball says:

    I respectfully disagree Perry. If you allow a “float tax” to a cap of $4, oil companies will float their prices as close to that $4 aspossible as that is the price the consumer is willing to pay.

  3. We need to do major investment in alternative energy. We are now dependent on a non-renewable asset from unstable regions in the world. It’s a win-win for the environment and the economy if we can get off of fossil fuel dependence. I worry though, that in the short term we’ll turn to coal, which is extremely polluting.

  4. With the FUBAR Obama economy the demand will stay below par but at some point the economy will come back and oil will easily triple.

    The currency slide is attributable to the Obama stimulus plan and despite a good teleprompter routine fundamentals do not change.

    Mike protack

  5. RSmitty says:

    Oh, how I just so enjoy following Jimmy Buffett’s #1fan (no offense to Jimmy, whom I so much enjoy, but you can’t look past the talking-points-like-a-parrot(head)).

    1st – Why does everyone conveniently look past the annual increase of prices in the spring-to-early-summer? It’s reformulation season, so many of the functioning portions of the refineries go offline at least temporarily to reset the ingredients into the process. Apparently, some now use water (snark). Bottom line, no matter the economy, you are almost guaranteed to get price pops this time of year for that reason (the supply almost always dwindles from late April to early June due to this, no matter the demand).

    2nd – Travel season to one of the biggest consumers of this end-product on the planet. Nothing like demand, even if only tweaked higher, going against the suprpessed supply as mentioned in #1.

    3rd – Summer formulations are significantly more expensive to produce compared to the other three seasons. The base cost of the product amounts to an average of about 15-20 cents per gallon of finished product (this is what was told to me while in presence of a “gas man” (no, he didn’t eat El Som’s burritos) a few years back – my number range may be a little off, too, I’m going by memory). Take this bottom line and add that to #2 and #1.

    4th – Yes, the economy and the fickle energy markets. Did anyone happen to notice the trading value of US dollars the past week? LOOK OUT BELOWWWW! The very typical flee-from-dollars-to-energy-and-metals march is on, once again. However, signs are that this effect will be very pale compared to last year.

    5th – finally, the last of the list. Overall demand. Demand since the peak of last year is waaaay down compared to previous years, I believe, over the course of a five year period. The demand right now is incredibly depressed. Although many of the factors to spike prices are there, one major thing isn’t: typical demand. Consumers have been crushed over this past year. Unless the job market suddenly improves and does so significantly, fuel demand has almost no chance to recover to levels seen over the last five years. Sure, demand is up now, but compared to what? Jan, Feb, Mar?

    Here is what I think will happen, from my very unqualified IT world, but a personal world where I have to budget every freaking penny due to living on a cash-only basis: we very likely will get close to, and possibly eclipse $3/gal of Reg-grade gas. I do not forsee $4 happening this year, unless a significant global event (or regional, natural event) causes an unexpected run on gas. The economic factors aren’t all in place right now for that much of a spike, like last year.

    To Perry – I see where you’re coming from and understand why you think that, but to make that a norm, it will crush very many people that are on the edge. Maybe another day, another time (I do not support that, though), but right now, it would be crippling.

  6. I hope we don’t see $4/gal this year, but I think it is inevitable soon. Yes, I think some of the spike came from the spring-summer changeover, but as one of the articles points out, the price is not following the demand as it should. They think we’re on the steep part of the price/demand curve so small changes can lead to high prices.

  7. Perry says:

    Smitty, you might have a point, as I picked $4 because we’ve already been there. Some other number lower than $4 might be better. We need some experts to work it out.

    Meatball, point taken about the oil companies raising prices as close to $4 (or whatever $) as they can get. Therefore, god forbid, the government would have to exercise some kind of restrictions to prevent that from happening.

  8. Perry says:

    UI, I worry about coal too, especially since the Obama Administration favors it in the interim, repeating this faux “clean coal” rhetoric that the coal industry has invented to move their coal agenda forward. We learned all about it when NRG/Delmarva P&L/Harris McDowell were pushing it in opposition to the Bluewaterwind project.

    On energy, we really have gotten ourselves into a major fix with a combination of denial of reality and short term outlooks. I don’t think the Obama team has their act together yet on a coherent energy policy near term or long term.

  9. I also don’t think it is possible for oil companies to manipulate gas pump prices so easily. Oil is a commodity and the price is well-known and available on the internet. There’s too much competition in a commodity market to do price manipulation. The manipulation would come in the form of changing outputs but that isn’t so easy either.

  10. anon says:

    High fuel prices are the only thing that will expand alternative energy. Whenever fuel prices fall back, we get complacent and lose our sense of urgency. High prices alone will drive creation of new alternative energy whether it is taxed or not.

    So yes, high fuel prices will hurt the poor in the short term. But if we somehow manage to suppress fuel prices temporarily, it will be worse in the long run.

  11. I worry that you’re right anon. We don’t have the will to address anything until the problem is urgent. I wish we could keep prices low while we develop alternatives but I fear we won’t get serious about them until prices are high.

  12. Perry says:

    It is worth pointing out that the Europeans and Japan have had a high tax on gasoline for years. The result: They drive smaller, more fuel efficient cars, and they have built a comprehensive public transportation system.

    We have neglected to take similar steps in the past, so look where we are now, having a continually growing dependence on fossil fuels at a time when economic considerations and global warming concerns would dictate that we should be changing.

    Europe is better positioned than we are re vulnerability to fossil fuel energy price increases. Given better energy policies out of Obama, it will still take us many years of patience and conservation to get passed our mistakes of the past.

  13. Perry says:

    Anon, you make a good point about high fossil fuel prices forcing alternate energy programs.

    This is what motivated my energy policy suggestion described in post #1 as a way to fund an alternative energy program.