October 11, 2004

The Price of Gasoline

John Robb is one of my daily must-reads. He’s in the midst of writing a book on Global Guerillas, and appears to be posting all of his research notes. It’s been fascinating reading, and I can’t wait to see if his book will add another layer of insight to the issues that’s he’s been covering in his weblogs. Of course if the current insights are any indication, I’m sure I’ll be pleasantly surprised.

The reason I mention John is because of a piece he posted on Saturday where he pointed to an article in the Christian Science Monitor on the potential impact of $50 oil on the global economy. At the bottom of the entry is this quote from an analyst at Morgan Stanley named Stephen Roach. He says:

“Oil is now at the price point that could provide a serious shock to an unbalanced world economy; if WTI oil prices hold at around $50 for another 10 weeks or so, the risk pendulum should swing toward global recession in 2005.”

I couldn’t help thinking about that quote as I filled the car up yesterday at the Texaco station down the hill from us. When the tank was full I looked at the pump and went inside to pay £51.29 for 59.71 litres of diesel. Let’s skip the higher math and cut to the chase – yes, that’s right, I spent $91.80 to fill up a 15.8 gallon tank. At $5.81 per gallon.

For those of you reading this from the US, you’re probably gasping and shaking your collective heads. How could you possibly consider paying that much for gasoline? Are there any cars on the road ? Are the trains and buses completely packed with people paniced at paying $5.81 a gallon for gas?

Well, actually, no. From my perspective, $5.81 per gallon seems to have had little or no impact on car usage here. The roads appear just as full as they are in the States. People drive just as fast, and on the freeways a whole lot faster. And while I would guess the average miles-per-gallon is significantly higher here than in the US – for example we have a Ford Galaxy minivan that gets 40 mpg, while the equivalent van in the US barely gets 20 – there are plenty of high performance cars that get crappy gas mileage here too.

How can that be? How is it possible what with gasoline at $5.81 a gallon, not only is the UK economy in better shape than the US economy, but it appears to have had little or no impact on people’s driving habits?

I’m no economist, and so I can’t say whether there’s some obvious econometric reason for this. But I don’t think it’s about economics. I think it’s about human nature. And my take on human nature is that we humans can get used to just about anything, and the Brits have definitely gotten used to higher gasoline prices.

What does this mean for the US? I think it means that if oil stays at $50 per barrel, and then climbs slowly but inexorably towards $60 and beyond, the American consumer will simply wind up doing the same thing the Brits have done – they’ll get used to paying higher and higher prices. Sure they’ll balk for awhile, and the news media will wring its hands, and the Republicans will get red in the face, and the Limbaugh listeners will sit for hours in long lines to save $0.10 a gallon. But when it comes right down to it, the US consumer will do exactly what Dumbo did when the mouse said “Sit up and beg” at the little local circus we took Nathaniel to recently, they’ll simply ask “How high?”


Ok, I know I’ve been a little glib here, but I really couldn’t help making reference to the Dumbo picture I took at the circus. Of course a steep rise in oil prices could, and likely will, have some severe negative consquences. First, a sharp rise in prices could shock the world economy into a recession as people and corporations reallocate resources to deal with the increased costs. Second, countries like India and China which are experiencing surging demand, will likely switch from oil to coal wherever possible, causing increased air pollution world-wide. And third, a negative feedback loop will be created whereby global guerilla attacks on Middle East and African oil infrastructure, including in Saudi Arabia, will create escalating tensions, driving oil prices even higher.

The saddest thing is that this all could have been forestalled with just the teeniest bit of actual leadership from our so-called leaders. What could they have done? First, they could have reduced US demand, and second, they could have done something in the Middle East that actually had a chance of reducing tensions there. And it wouldn’t have been hard – US demand could be reduced with something as simple as increasing the miles-per-gallon on new cars sold in the US by a miserly 10%. Or imagine that when Arnold became governator of California he got on tv and said “Sure, I used to drive a Hummer, but now I drive a Prius, and I want all Californians to follow my example and conserve gasoline". How much easier could it have been?

But no, there’s really no incentive for either Bush or Cheney to do such a thing. Why? Because they, and their wealthy supporters, are the ones who will be most positively impacted by the price of oil going up. Check out George Bush’s tax return for 2003. It shows that he made over $395,000 in interest on an oil trust last year. Does George Bush care if the average American has to pay $500 more this winter to heat their home? Of course not. Because next year his interest from The Lone Star Trust is going to have gone up a lot more than $500. You can bet on it.

Posted by: Frank @ 12:46 am — Filed under:

8 Comments »

  1. Small correction. The loop you describe is a positive feedback loop, with the oil market pricing system as the function being controlled & guerilla activity working as a controlling process. The more attacks there are, the higher prices go. The higher prices go, the more incentive there is to attack the system. Classic positive feedback.

    Tim

    Comment by Tim Keller — October 11, 2004 @ 5:57 pm

  2. I think in a place where people routinely pay $3 for a grande non-fat latte mocha no-whip froth-thing, and $2 for a small bottle of water, everyone’s gonna get over paying $2.50 for a gallon of gas (which is what I just paid). If Google’s conversion chart is right, the equivalent gallon of latte would cost $48 – and regardless of whether you’re a Peet’s or Starbuck’s fan, that’s a ridiculous amount of $$ for a cup of coffee. I’d wager that not one person in either of those places knows what they’re paying per gallon of coffee – but everyone would know what they just paid for gas. If the world economies are really going to go broke because of oil at $50/barrel, shouldn’t we all be selling Starbuck’s short first?

    Comment by Jeannie — October 11, 2004 @ 10:36 pm

  3. I don’t know the statistics but apparently many, many Americans are a pay check away from trouble, have little to no savings, so as long as the illusion of ‘everything’s all right, cause we’re -thank God - Americans’ can be maintained people will just carry on till their lives crash. Then they’ll just disappear into the ranks of the poor or forgotten.

    Comment by Haydn — October 26, 2004 @ 2:58 am

  4. Since a US Gallon is SMALLER than a UK Gallon (by 20%), the price comparisons in the article above are a bit misleading. The comparative price for $5.81 per UK gallon stated should really be $4.65 per US gallon. This does not alter the fact that gasoline in the UK is priced MUCH higher than in the US, resulting from differant taxation rules.

    [Frank says: Thanks for the comment but you might want to check your math (or maths as you Brits say :-).
    At the time I wrote the piece it was $1.79 to the £

    £51.79 * $1.79 per £ = $92.70

    $92.70/59.71 = $1.55/liter

    3.78 liters per US gallon * $1.55 = $5.86/US gallon

    And when it hit $1.92/£ a couple of months, it was also closer to 92p/liter, which meant that I was paying almost $6.68 per gallon. Double ouch!
    ]

    Comment by Richard — August 2, 2005 @ 12:21 pm

  5. What about TURKEY(TURKIYE) , We are paying $ 9(nine) per gallon. Even though Turkey is the poorest country in Europe, Turkish people have to pay this. Is this justice. I can buy only 100 (hundred) gallon gas with my salary (I am electronic engineer in the government for 27 years)

    Comment by Ahmet Yurekli — November 26, 2005 @ 10:13 am

  6. I want to move to England in the next year because I am young (19) with no husband/children yet, and I can. However, I’m scared out of my mind, and am welcoming any tips or suggestions on how to make life easier when I arrive. Thank you!

    Comment by Natalie — December 15, 2005 @ 8:15 am

  7. One aspect about gaoline prices that will affect Americans more than Brits is that Americans typically commute longer distances to work, play, or vacations. Higher fuel prices cuts into pockets faster. I drive a car that gets 42 mpg on US interstates and I average about 35 mpg on my daily commute, which is about 60 miles a day. I would rather drive a pickup truck or a sprtier car, but budgets dictate that I must drive something more economical. Americans want to drive trucks, sportcars, and the like because that’s what we’re use to driving and it is part of culture beleive it or not. So Americans will either have to change habits and lifestyles completely to afford to go to work, play, and vacations or use a alternative fuel. Enter ethanol.

    Comment by Jason — March 8, 2008 @ 4:01 pm

  8. Yes, I agree John Robb is a must read. Btw, why is it that fuel (87 octane) is selling for $4.25 per gallon up in Alaska where it is supposed to be “oil rich"? This on or around first week of October 2008, when in fact, near Anoka, Minnesota some stations are selling it for $3.01?! Would a republcan regime really help in lowering fuel prices in the future? Especially with the veep being from Alaska? Makes you wonder!

    Online Fuel Price Checking Tool

    Comment by Dan — October 6, 2008 @ 2:25 pm

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