Gas prices: in for the long haul

When oil prices spiked to $70 per barrel in the wake of hurricanes Katrina and Rita, we wrote an editorial titled “Real, and here to stay.” The conventional wisdom at that time was that, since Rita missed Galveston, gas prices would soon subside. We disagreed, and opined that we would most likely see $3.49 a gallon at the pump before we ever saw $2 again.

We would rather have been wrong, but we never did see gas dip as low as $2 a gallon after that, and we have seen $3.49 and more over the past few weeks. This might be a good time to review why we expected gas prices to continue rising back then, and why we think they will continue doing so now.

The major reason we cited for expecting an uptrend in oil prices in 2005 was “peak oil.” The supply of oil is finite, and we are nearing the point at which oil production hits its maximum and starts to decline—while demand still grows. This idea has become common currency, even in the oil industry. A couple of months ago, the CEO of Royal Dutch/Shell put the danger date at 2015; the chairman of Hess Corp. said he expected a crisis within 10 years.

But a couple of other factors have made things worse. A long-term chart of oil prices shows that the price of oil per barrel stayed in roughly the same range from the 1940s through the ‘70s, spiked strongly starting with the Arab oil embargo of the early 1970s and then settled into a higher but stable range from the 1980s through roughly the end of 2002. Then, starting in early 2003, prices shot through the top of that range and have risen steeply ever since. It is almost certainly not coincidental that the price surge started at the same time as the invasion of Iraq, which not only reduced Iraqi oil output, but more importantly, increased uncertainty about future Middle Eastern oil production.

Then there’s the Federal Reserve, which has been reducing interest rates relentlessly to try to stop an implosion in the financial sector. This has had the unfortunate side effect of sending the dollar’s value plunging. Most oil is still paid for in dollars and declines in the dollar translate directly into lower income for oil producers; in terms of purchasing power, the price of oil in dollars has to rise just to keep producers’ incomes constant. To this extent, the Fed’s actions have been feeding directly into oil and gas price inflation.

Sadly, none of these factors is likely to improve in the near future. By definition, the peak oil effect can only get worse. If a Democrat is elected President, the American presence in Iraq may be reduced starting next year, but the increased instability that was created by the invasion will probably be with us for quite a while regardless. And we have yet to see a politician brave enough to tell the Fed that it may be making things worse, not better, by cutting interest rates—especially in an election year.

Our short-term options in dealing with this problem are unfortunately limited. Those of us who can afford to can buy hybrids. The rest of us should consider downsizing the next time we purchase a car; the era of the SUV is over. We can try to drive less, consolidate errands and car pool.

It is for the longer term, and as a community, that we have more options, and we need to pursue them. It’s because we didn’t do so in the past that we have so few short-term options now. We can support legislation to improve fuel efficiency and develop alternative automobile technologies. We need planning and zoning initiatives that encourage the development of walkable neighborhoods rather than suburban sprawl. Buildings can be built or retrofitted for vastly improved energy efficiency (see this week’s “My View” on the op-ed page). And sustainable energy alternatives, such as those endorsed by the Sullivan Alliance for Sustainable Energy, must be pursued aggressively.

Commodity prices never go straight up or down, and oil prices are no exception. Especially if, as many fear, the world is entering a recession, we can expect to see a temporary pullback—possibly even a sharp one—in prices of gasoline and heating oil sometime this year or next. But don’t be fooled. Like the post-Rita respite, it won’t last. And it is only by working on changing our ways over the long haul that we can see to it that we don’t get backed into this kind of corner again in the future.

Also in this issue:

• Building smart

Dr. Punnybone

Get Over It!