Gas prices rising, demand remains constant

I am a "news nut" and browse all of the different networks' pages practically daily. I am also a commuter who drives an SUV (yes, I know, poor choice of automobiles at this time) so gas prices are concern for me.

On June 2, I read an article named "OPEC Chief calls for higher oil output" at MSNBC.com that talked about the rise in gas prices and how it hasn't deterred many people from purchasing. There was also a graph depicted showing that between 1970-1981 people did lay off buying gas when the price rose. I believe that this would fall under the trade-off idea in the fact that there is a trade-off between gas prices and autonomy (driving oneself).

Today at http://money.cnn.com/2004/03/29/news/economy/gas_prices/ is another article that talks about the rise in gas prices and demand has remained constant. Check it out, and others like it, because if you are an autonomous automobile driver this may concern, or intrigue, you!



Kid said...

I recently spent a few weeks in Europe and the gas there is sold in liters (which make sense, since they use the metric system) and on an average it cost them four Euros to get an equivalent of our gallon which is only two dollars. We as Americans just might not have it as bad as we think. I do have to say I’d much rather pay two dollars then four. One thing we do have to remember is that as the gas in America goes up it tends to do the same thing world wide.

Dr. Tufte said...

The "rise" in gas prices has gotten a lot of attention in economics-oriented blogs because it has been so poorly written about in the popular press. Tbe best examples of this are probably at Deinonychus antirrhopus and Knowledge Problem (the latter is actually written by a woman at Northwestern University who specializes in the economics of energy). Go to these sites and search through them using keywords like gas prices if you want to read more.

The issue is that gas prices have risen to their highest level ever, in nominal terms (this is a concept you'll pick up if you take the macro class). In short, nominal terms means in terms of dollars. The problem with this is just about everything is at its highest price ever in terms of dollars. But that isn't a problem for most people because we also make a lot more dollars.

But, there has been a short term run up in the price of gasoline relative to other products. This worries some people. On the other hand, the opportunity cost of buying gasoline, expressed in terms of what you have to forego purchasing to buy gas, is very close to the lowest it has ever been (in spite of the recent run up in prices).

micahnay said...

This website tells us that even though a lot of analysts are saying that oil will eventually return to $30-$35 a barrel, a lot of economists are telling us that the world is producing a lot less than we were just a decade ago, which is alarming because we have perfected the drilling, extraction, and processing of the oil so we should be getting more. Some economists believe that we will continue to have shortages after shortages, which will peak at about 2010. They believe that at this point, we will be paying about $4 a gallon of regular gasoline here in the United States, which is nothing compared to the $9-$10 they will be paying in Britain and parts of Europe. This problem is only going to get worse. We need to conserve our oil reserves because once it’s gone it’s gone. Conserving will only give us a little more time though; the only solution to the problem is perfecting the other forms of energy that we have been “playing with” for the past decade. This is why it is so important for us as the younger generation to get out there and educate ourselves about what is going on, who to elect to our local, state, and federal governments to help us fix the problem, not just masking it by talking OPEC into producing more oil, that just makes that problem worse. This article, for me was a real eye opener. I had no idea how bad things were going to get, and how quickly they were going to get that way. 2010 is just six years away! Get out there and make a difference, vote for solutions, not quick fix-its.

Dr. Tufte said...

Micah does not have a link to the webpage he is discussing, but the address at the bottom of his comment can be cut and pasted into your browser.

This article begins with:

"With oil prices touching $42 a barrel on the New York Mercantile Exchange, many economic commentators have gone into denial, pointing out the many reasons why prices can be expected to relapse again to the $30-35 range. Yet there is an alternative scenario..."

It then follows up on the alternative scenario.

Micah is entitled to his opinion, and is free to support them here. Please don't be offended if I offer what I know about the situation. I'm not an expert, but I do keep up on issues like this.

First, the economics blogs that keep up on this best are Knowledge Problem and Deinonychus antirrhopus (links to the left). These are both written by serious economists who are experts in this area. They write frequently about issues like this, and do not support the viewpoint in this article.

Second, here is a quote from Sheik Yamani, the head of OPEC during its most successful period: "...the stone age did not end for lack of stones ...". The stone age depended critically on stones, but ended when other resources became more valuable. Most "ages" work this way, and economists are pretty sure that the "oil age" will not end because we run out of oil, but because we figure out a better alternative.

More specific comments about Micah's post are:

1) This point is macroeconomic in nature. The price of oil quoted is in terms of pieces of paper called dollars, whose value is declining through time. That means that this price can't be compared to past prices without correcting for inflation. Doing so shows that the price of oil, while it has spiked recently, is near the lowest it has ever been.

2) There are actually very, very, few economists who think that the price of oil is going to go up. There is a ton of evidence that the price of almost all resources is falling. Having said that, economists are quite certain that large upward spikes in the price of oil can be caused by uncertainty about political situations. It is not a coincidence that oil spiked this spring at the same time that the situation in Iraq deteriorated.

3) We are better at drilling for oil (as Micah points out). This is the biggest contributor to the long term decline in the price of oil. (Just for trivia sake, did you know that if you have an oil well in this country that is not profitable to produce from, you have to fill it with concrete so that it can never be used again? This is a make-work law to provide jobs for drillers).

4) I am dubious about claims of "shortages" of oil. What I do know is that we have a shortage of refineries. The oil companies desperately want to spend their own money to increase capacity, but they have been blocked for the last 2 decades.

5) Exacerbating the problem of refineries working at capacity is that states increasingly impose their own fuel mixtures on the refining industry. There are now 42 such mixtures. Every time a refinery wants to switch from one to another, they need to shut down to retool for a few weeks. We have price spikes every year in March and April as refineries switch from cold weather to warm weather blends, and are unable to meet demand for one or the other.

6) Did you know that our oil reserves, in terms of years of consumption they can support, are at record highs? Most people don't. The reason is pretty simple - it doesn't pay to find new reserves until shortly before they are needed. Government agencies have repeatedly warned that we are running out of oil (going back to the 19th century) based on this sort of analysis. If you applied this analysis to your household you would predict starvation, because the reserves of food in your fridge can only support your consumption for a few days.

7) The above points are reasonably solid. This one is more speculative. Did you know that geologists don't understand where oil comes from? There are two competing theories. The biotic theory holds that oil comes from the decay of surface plants in the past. The abiotic theory holds that oil is being produced currently by bacteria that live underground. The former is still the majority theory, but it is losing ground to the latter (largely because of mounting evidence that the pools of oil tapped by wells appear to refill from below). The importance of this is that it isn't clear that the claim that there is a fixed amount of oil in the Earth's crust holds water. It definitely holds water for something like coal, where only the biotic theory is sensible. But then ... no one is worried about running out of coal.

In sum, I am professionally certain that we will not run out of oil in your lifetime. I've said it here publicly, you know where I'll be if I turn out to be wrong, and you are invited to stop by and remind me how dumb I am.

Jordan said...

Dr. Tufte said in point 7 that geologists seem to be thinking more and more that our supply of oil is not fixed. This is quite different than what the media touts every day. Thanks for shedding light on this subject!

Dr. Tufte said...

This is a fun one to read several years down the road.

If anything, we hear a lot more about running out of oil now than we did when I first wrote this.

The thing is, we need to take the price of oil relative to other storable commodities (this is one feature of oil for which there are substitutes that most people don't think about). It turns out, that in terms of other commodities, oil has actually gotten cheaper. What it actually has gotten expensive in terms of is, is financial assets (like money). Next to cocoa, wheat and tin, oil looks pretty cheap right now.