A Brief Discussion on Fuel Prices

It's a fact: the US economy runs on petroleum. Why? A number of reasons.

1. Consider our history. The bottom line is, we pretty much started on coal to power steam engines, and then oil to power internal combustion engines. After we stopped burning wood to heat our homes, we moved to natural gas. Today, coal has stopped powering steam engines, but does supply most of our electricity. Oil continues to power engines of all sorts. Natural gas continues to heat buildings. This is the way our modern world has always worked, and until recently, there have been few reasons to change.

2. Consider our geography. The US is one of the largest countries in the world, geographically. Russia's the biggest. Canada comes in second. The US comes in third. After that comes China, Brazil, Australia, and India. If you actually look at where people in Russia and Canada live, there are vast tracts of land that are completely void of any human presence. Russians and Canadians tend to stick to the south and border/coastal areas of their countries, particularly because the northern areas have much colder weather. There are places in northern Canada or Russia, for example, where you could walk two hundred miles in any direction and never see a single person. This would be virtually impossible to do in the US, because of our more temperate climate; thus, we have spread ourselves out into almost every corner of the country. Obviously, some areas of Wyoming, Idaho or Montana are relatively uninhabited, but this is--in the grand scheme of things--only a very small part of our land area and an even smaller part of our population.

The fact is, US workers just don't live right across the street from where they work. They usually don't even live within walking or (convenient) biking distances. A huge number of people drive to work. As a result, there are (according to the Christian Science Monitor) about 600 cars per 1000 people in the US. China is larger geographically than the US, and yet China only has a staggeringly low 13 cars per 1000 people. Why? In China, most people either live in the cities, all crammed together, or out in remote rural areas, working on farms. The only recent suburbanisation of many Chinese cities has been a boon to Chinese automakers like FAW Group Corporation and their Jiaxing MPV, a line of inexpensive minivans with very small, fuel-efficent engines. Almost everyone buying a car in China right now is a first-time car buyer; their parents never even had a car. They are happy simply to be able to get around; they aren't drooling over a V8 HEMI.



3. Consider our politics. Long after we might have started to take a long-term route away from oil, perhaps in the 1970s, amidst various petroleum supply issues, the entrance of Japanese car companies into the American market, some of the first practical electric cars, the advent of wind and solar power, energy-efficient buildings, the rise of environmentalism and cultural change, we neglected to make a real effort to reduce dependence on oil, because prices came back down. In late 1995, prices at the pump reached a phenomenally low mark, at $0.99 in some states. From 1995 to today, SUV sales have continued to increase because our government doesn't tax petrol the way other countries do. More to the point, in the Netherlands, gasoline is about €1.55 per litre, which is over $7 per gallon. In Sweden, it's $6. In France, it's $5.50. In Japan, it's $4.60. The benefit of expensive gasoline is actually threefold. The first is that it encourages people to buy fuel-efficient vehicles or alternate-fuel vehicles. The second is that it encourages people to use other means of transportation. The third is that it stabilises the price; when oil suddenly becomes more expensive, the tax is simply cut, and the price remains about the same. Unfortunately, because our administration is so tied to the oil industry, the price stays very low, and therefore becomes susceptible to even minute fluctuations in the supply chain.

Now we understand too why oil is so cheap here; it is central to the economy. But why was it $2.00 a year ago, and now it's $3.00?

The short answer is that Hurricane Katrina obliterated 95% of the oil production on the Gulf coast. The long answer is that this 95% is a quarter of our domestic production, and when we have less domestic oil to work with, we need to purchase more from other places, which costs money. Simple laws of supply and demand can be applied, of course, but it's more complex than that. Right now, in Indiana (where I go to school) I pay $3.30 for a gallon of petrol. Historically, the state has had some of the lowest-priced fuel in the country. Meanwhile, California has traditionally had much higher prices than the rest of the country, but at the moment, their cost is hovering around a mere $3.00, so Indiana's prices are actually much higher than California's for the time being. The reason for this is that Indiana gets most of its fuel from the Gulf, while California doesn't; California has derricks off the coast of Baja, they ship it in from Venezuela, Canada, and other places.

The most interesting part comes in predicting the future. FEMA and the Army Corps of Engineers have stated quite plainly that it will take literally months to pump out all the water from New Orleans, and literally years for the city to mostly recover. Although few have expressed interest in admitting it, this amount of time is also going to apply to restoring oil refinement facilities on the Gulf. The Strategic Petroleum Reserve, which is normally supposed to help out in times like this, isn't of any use because nearly all the SPR's oil is crude. With no refineries to turn it into petrol, diesel, and other fuels, prices at the pump will stay high for a while. The question is, how long will they stay that way? When will they come down, if ever?

If prices drop relatively soon, there may sadly be no measurable migration towards smaller, more fuel-efficient vehicles. However, if prices stay high for nine months to a year, automakers will almost surely notice a considerable drop in the sales of SUVs and trucks, marking a return to an early 90s ratio of car sales to trucks. If prices stay the way they are, the rest of the US may adopt laws already in place in California that appropriate lanes on highways for carpools and hybrid vehicles and create tax breaks for both the buyers and sellers of alternative-fuel cars. If prices actually continue to climb, perhaps averaging $3.50 to $4 nationwide, I believe that much of the American public will be forced to begin to rethink their very lifestyle.

Is expensive petrol the same as scarce petrol? Sort of, but not completely. Right now, the US faces a bleak situation, for oil is both inexpensive (compared to Europe) and scarce. This environment allows for the public to ignore the long-term consequences of their actions, leading up to possibly very dangerous results. In Europe, however, fuel is more plentiful, yet more expensive; this persuades consumers to become used to alternative fuels and smaller vehicles before oil becomes very difficult to come by, so that when that time finally comes, society as a whole will be ready. In the United States, consumers are so reluctant to even switch to a diesel car or a hybrid car, or even simply a car (from their SUV) that the chances of very many consumers being ready to drive an electric vehicle in the near future is quite slim.

Take its toll as it may on the economy, I can only hope petrol prices stay high just long enough for us to notice our own utterly foolish behaviour.

--Eoban