Sunday, April 17, 2005

We'll look back on those days fondly.

Cheap Oil. I remember those days. From cheap oil we got cheap gas. Well, cheap in comparison to now. I remember being in the South in the late 90'S and being able to pay less than 90 cents per gallon in South Carolina. In Vermont, these days, it costs me about $2.17 a gallon. The price of a barrel of oil has been bouncing around the $50 mark for several months now, and there is no indication that it will fall any time soon in fact, most experts are looking for the price of oil to increase consistently from this point out.

So what's going on here? Well, the unfortunate answer is that the market is doing exactly what it is supposed to do: finding the equilibrium price. With the growth of the global economy (especially in Asia) the demand on petroleum has gone up with the amount being produced staying steady. And when demand outstrips supply, prices go up. There are three basic geographical components to this:


Unless you think the growth of the Indian and Chinese economies are just fads? This is a trend that will be maintained without any signal of reversing itself. As China moves itself from an agrarian economy into an industrialized one, it will continue to consume more petroleum in order to run its infrastructure. Indian growth has to a larger extent been a technological one (whereas the Chinese growth has more largely come from manufacturing), but the result has been the same: an increase in consumption of energy.


A strong component to the new European Union has been the dispersal of developmental funds. Where Western Europe has a new playground for cheap labor in the Eastern part of Europe, any move to the East to produce goods and services will increase energy consumption in that part of the world. Are you willing to bet that as Europe strives toward being a global economic power bloc that it will do so only in an energy conservative manner? Neither am I.

Another aspect of this is that Europeans are used to paying prices that Americans would balk at. $6 for a gallon of gas? They're used to it, we're not. Then again, Europeans have altered much of their societal habits when it comes to transportation so that the amount of gas that they typically consume on an average basis is lower than their American counterpart.

The United States:

We love energy! And we use a lot of it too! The US uses more energy than any other nation on Earth (we also drive more of the global economy than anyone else too, but that is another topic for another day). From the late 60's and early 70's you saw a demographic change in terms of how and where middle class American started moving. Suburban sprawl became a thing of the present as more and more Americans sought out the American dream by moving to the Burbs. Of course, they still had to get to work. So we started driving further and further to get to work and spent more and more time in cars. As our ability to produce more petroleum hasn't increased much in the last few decades, we have continued to use more and more oil (part of this is natural as our population has increased and another part is simply our choice to drive less efficient cars).

There has been a recent turn in the automotive industry to produce more efficient cars. Not surprisingly, it has been foreign automakers that have beaten the Big Three automakers to that punch. Honda has several different models that follow the hybrid model

and are able to get over 40 mpg. This last year, Ford introduced the Escape Hybrid, which uses hybrid technology and is also able to be driven in what they call All Wheel Drive? But the problem for the United States is that while these new model vehicles are a start in reducing oil consumption, the percentage that these models are to the market is so small that they have made no discernible change to the amount of oil consumed on a daily basis.

As the global economy continues to grow, the demand for energy will continue to grow as well. And as demand grows, so will the price for fuels.

I don't see there being any dramatic change in the consumption habits in Asia, Europe or the United States. The only thing that would drive such a change would be an energy crisis on the scale of what we saw in the early 70's. The problem with that is that to correct such a crisis, there would have to be rapidly enacted reforms and self imposed behavioral modifications that I don't think that either the American people or the American people are able to handle. Continued strains on production abroad will force both consumers and businesses to pay more for what is considered a necessity.

The irony is that if tomorrow gas dropped to $1.00 a gallon, consumption would only grow at an even faster rate than it is now. Non-renewable energy is funny that way.

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