What Happens When Gasoline Exceeds US$7.00 Per Gallon?
by John Laumer, Philadelphia on 05. 8.08
MSN MoneyBlog man Charley Blaine has a very scary thought. Extrapolating from a projection by Goldman Sachs analyst Arjun Murt, he details a few key implications of US gasoline prices exceeding 7 bucks, inside two years.
Though more welcome scenarios are also plausible, it's worth pondering the secondary impacts suggested for the 7-buck gas outcome. This goes way beyond "Should I ride the train instead."
Will there be any U.S.-based auto manufacturers left? The answer depends entirely on how fast they can transform their product lines. Chrysler is in deep trouble already. That probably means more stress for the Midwest.Will there be any domestic airlines left? The so-called legacy airlines (American, United, Northwest, Delta and Continental) would either try to combine into one big carrier or simply disappear. They're having serious troubles surviving as it is. This means big troubles for cities where these airlines operate hubs that generate thousands of jobs like Atlanta, Cleveland, Newark, Houston, Chicago, Denver, Dallas, Memphis and Minneapolis-St. Paul.
How will big convention cities survive? Places like Las Vegas, New Orleans, Atlanta, Chicago, New York, San Francisco and Houston have thriving convention industries, all built around the capacity of airlines to transport conventioneers to and from the destinations relatively cheaply. Emphasis on the word "cheaply."How will tourist destinations like Florida or Hawaii cope? Add to that places like, say, Williamstown, Mass., whose Williamstown Theater Festival is a big draw, or Ashland, Ore., home of the Oregon Shakespeare Festival. They're not close to major cities.
Here's a future puzzle. Write down the cities Charley mentions. Circle, in blue, the cities facing a water shortage; red, those at increased risk of hurricanes; black, those likely to experience severe job losses.
No away from it, is there?
That transition town idea is going to look pretty attractive in a few years, if this is indeed the future we are heading toward.
Our two cents:-
End times for snowmobiles, 100 HP power boats, and off-road vehicles. Trailering costs alone would do them in.
Regional "destination" shopping centers - RIP.
Elected officials tripping over themselves to subsidize passenger rails. Puleeeze!
Oil company executives: no fun on that job. Too many Congressional inquisitions.
More about Transition Towns in:
Rob Hopkins of Transition Town Towns and Transition Culture ...
Transition Towns Reach Australia: Another Community Prepares for ...
Transition Towns Are Spreading: Communities Take on Climate Change ...
Local No More: Transition Town Currency Sold on Ebay :
Transition City Bristol: Tackling Climate change and Peak Oil with ...
The Transition Handbook: Community Resilience in the Face of Peak ...
Via::MSN, Money Blog, topStocks, "A scary thought: Gasoline at $7.50 a gallon" Image credit::Keetsa Blog, "Liverpool South Parkway station"
Seven dollars a gallon in two years? Very bad.
This is, however, not going to happen. Three reasons:
1) Market equilibrium pricing. Economics 101. If, say, Delta and American Airlines stop flying, then there's suddenly an extra supply of fuel, which lowers the price of fuel.
Or (gasp) Americans stop driving gas guzzlers, and there's a huge switch towards bicycles (which I'm certainly for) and efficient sedans. Again, demand decreases and therefore price decreases.
2) OPEC has stated that it has a target per barrel price of oil at around 75-110 dollars per gallon. Production has been decreasing because of a lack of investment in modern refining facilities, coupled with slow expansion into new oil fields. This is currently changing.
Likewise, there's excess drilling capacity that isn't being utilized. Why? The same reason why diamonds really aren't rare, but cost a fortune: their production is controlled by a cartel (DeBeers with the diamonds, OPEC with the oil) who have a vested interest in high prices.
Again, economics 101: Higher prices do not always mean higher profits. There is a price equilibrium point where profit is maximized, that point is currently determined at ~75-110 dollars per barrel.
3) Brazil. Yeah, we've all heard and (especially here) somehow ignored the discovery of a massive 33 billion barrel field. There's currently a -huge- price incentive to tap this field, and with rising prices, that incentive (and thus, production) will increase.
Doom and gloom scenarios are certainly in vogue. I'm not denying the problems of a hydrocarbon based power grid and transit system, but I -seriously- doubt that we have the apocalypse on our doorstep.
=== author's response follows ===
I would be the first person to say that no one can predict the future with certainty. However, it is certainly possible to produce several conflicting but equally plausible future scenarios - this being one.
In this scenario we might have:
China and India continue to escalate demand for oil products (loss of price elasticity).
Global trade increases (more shipping consumption)
Hurricane again trashes the US gulf coast production/refining.
Alberta Tar Sands become an environmental travesty, leading to mandatory costly controls and slowing of production.
Iraqi production remains stalemated
Geopolitical upheavals in several of the oil producing states.
etc etc
As I say, no one can predict the future; but having all these nightmare factors line up is certainly plausible as none of them are within our direct control.
The really startling part about this article is that it will happen in the near future. An economy of people living paycheck to paycheck does not have a lot of elasticity for our current demand for cheap air travel. The price of aviation fuel and the entire supply chain for that industry survives on low fuel costs and disposable income.
I think the wakeup call this summer as gas prices spike will add a whole new awareness to this issues.
Thanks for the article.
Cheers - Eric - PickupPal.com
My 2cs...
Realistically oil prices are not going to go down. Producing countries and companies have established we're willing to pay the higher prices; the prices are going to stay high. We're oil addicts and they know it.
As for US vehicle manufacturers; they've managed to forget all the lessons of the late 70s and early 80s when oil prices decimated their market and they've managed to make the same mistake twice. In my view to make one mistake is unfortunate but to do it twice is negligent.
Domestic airlines will survive - B's lesson in supply and demand is clearer for an airline than it might be for global oil prices.
Vegas - I'm sure Vegas is savy enough to survive.
Travel generally might be less commonplace than it currently is and I think more people will stay at home and work on a computer rather than commute to work on a computer.
Nothing much will happen.
Petrol is around £1.10 ($2.14) a litre here which makes it over $8 a US gallon.
Car sales still increase year on year, average milage increases year on year, only 3% of kids go to school on a bike, commuters are commuting more miles than they ever did so they can live in the country and work on a business park 45 miles away and people still buy Range Rover Sports and other luxury SUVs.
Sorry, but most people are so addicted to cars that they'll pay any amount for a fix.
Don't like targetting people, but, B - there is more to a global economy than the US. Just because home consumption falls, doesn't mean consumption abroad won't continue to rise. This is especially true of developing countries, where fuel taxes are lower and so oils remains economically viable for longer.
As for production, that really depends the political climate. The US can only control US oil production. Russia has already shown that its willing to bully its consumers. Other producers will follow suit when they can make a fast buck.
Besides reserves are finite and so the cost oil will increase, new oil fields are just a stay of execution. So yes this is a worst case scenario, but somewhere along the long will come the chop.
This would be great! The economy would start shifting to a true local economy and mom and pop strores would thrive again. Of course the uneducated would need to become educated - more jobs for teachers. More jobs for carpenters (fixing up homes), people getting more exercise - almost everything would be better if we got most people to travel less. People, don't fear this - it really a good thing.
I cannot say or predict when the future cost of gas will hit 7$@G but I know it will hit this mark. When? Who knows. But I love that gas prices are sky-rocketing.
First, this will increase demand for alternatives and open up the market to these alternatives. The automotive industry has no choice but to adopt an alternative fuel method; consumers will demand it. So rather it be Electric, Corn, Hydrogen we will have alternatives.
Second, I want to encourage the Oil companies to continue increasing the price of gas. Please, please do not lower your price. If the oil companies lowered their price then the demand for alternatives will not be present.
There is a cost to all this and we are paying it now and will be paying the 7$ in the future. This is the price to pay but it is a short term price.
I read an article not too long ago that $7-$10 was about 4 years away. It seems to make sense that when demand starts dropping, price will too, but that's considering oil is an infinite resource AND OPEC is simply controlling oil supply for a quick buck.
While I don't doubt OPECs ability to control price or their greed in making money, nobody, not even them, knows exactly how much longer the oil gravy train is going to run. We're already seeing peak production points hit in our own drilling areas, so it's not exactly a stretch for OPEC to have hit a peak point as well considering we've been drilling massive amounts over there for a LONG time.
Brazil is a good oil move, but you can't think that they are simply going to hand over their entire stock to the US. This would mean even with our dropping demand (if airlines started going out of business and SUV drivers switched to non-gas guzzlers) other countries would suck up that oil just as fast as usual, probably drying it out in 2-3 years.
While I love the idea of riding that doom train, watching the oil companies spiral out of control in my fantasies, I have to say it's looking more realistic every day that they are coming to end and rather soon too. Will it be in 2 years? My guess is no. It also probably won't be nearly as catastrophic as imagined, in Mad Max style fights for the last oil barrel. It WILL probably affect long travel tourism towns first and non-self sufficient areas. If I had to throw a wild guess I'd say we'll be seeing $5 next year, $6-7 in 2-3 years and $7-10 in 4-7 years.
Now we just have to cross our fingers that the country gets it's head on straight before that time so that we can transition over to a new culture lifestyle in time to avoid too many problems. I think it's already a little too late to avoid some problems (like cheap restaurant food) but we can still salvage others (like transportation and continuing the backbone of the internet).
Yes, I believe the price of gas in the US will soar. Sad for those who will suffer, but, honestly, we deserve it. The failure of the US to use the 9/11 tragedy to jump-start a "Manhattan-like" project to develop wind and solar alternative sources of energy means we have lost seven years. The government needs to provide massive incentives for private industry to unleash their creative energies to develop the current technologies and new ones. The jobs in the US will increase. Our dependence on foreign oil will decrease and the possibility of a mass market for electric cars will be more likely. Obviously, some of the technologies will be less successful, but the outcome will be a more productive and healthy economy if only we will begin the effort to switch to alternative energy.
What would happen to online stores...if gas was so much would that hurt online stores w/shipping costs?
Opinions?
=== authors' response follows ===
Different business model will evolve for shipping. Overnight gone. Two-day gone except for medical supplies.
Freight accumulators will bulk things together and two weeks will become the norm for deliveries that are affordable.
First, the big problem with the oil prices still growing its very seriously, because the whole world, has an economy that depends from the oil, why? its easy all the products that we have in our homes, works, offices, and even the cloth that we use, are products that comes from the oil... so the problem its not only with the transportation, the problem it´s big because all that we use is oil transformed in a product...please think better about asking to the oil companys keep up the prices....
Second, Mr BUSH teach us, that we are addicts to the oil and the modern world depends of the oil bussines...
Third...POLITICS... there a lot of people that wants, a change in the politics of USA, and the only way to get that, is make that the people like you see why you should to make that change and elect a new president with a new vision, and how did they going to make that... its easy check how much money youre start to expend with your car gas... and from that way you can make a better decision...
Fourth... GLOBAL POLITICS; china is growing to fast and too much, its dangerous, and USA loose time with the irak war and loose market, its a big problem, how did they going to revert that situation??? with a war with china??? i don´t think so, the best solution is bring back an a CLOSED ECONOMY, it means MAKE A NEW LOCAL ECONOMY, the globalization its death, because is more expensive than a local economy and show us, that a free and global market anyone can make more money if use an "slave" economy as china does...
So the oil theme is big and isn´t a simple thing, envolves a lot things of the modern world, and oviously we need a change, but... are we ready??
As someone pointed out, $7 a gallon is still a dollar cheaper than in the UK.
I'm looking forward to higher gas prices. The real issue is not the price of gas but the availability of gas. Peak Oil will make an ugly entry to our public conciousness very soon. The upper middle and upper class will not care- they will be able to afford driving everywhere- it's the rest who will suffer for their luxury.
There's oil in everything, even in what we eat. EVERYTHING else including gas will be increasing due to material costs. Not just the freighting to your local mall costs.
If you think $8 a gallon is expensive, imagine a world where you'll do anything just to get some. Anything. There is going to be a worldwide market correction of this oil based economy.
Hi y'all! This is why we need to start manufacturing better alternative fuels than ethanol. You haven't even brushed the tip of the iceburg with the oil situation and the real crisis - food shortages.
Large farm equipment needs gas and oil to run. We're insanely dependant on large farms for food and obviously without the tillers and tractors and combines working, we won't be able to feed most of the people that live in large cities. You might think the solution is to move out to the country but what do you do then when the baby gets sick in the middle of the night and the nearest hospital is 75 miles away?
I don't think we're screwed quite yet, but I think we hit peak oil in the early 2000 and anyone that thinks prices will go down is not paying attention. Demand for oil in China and India is ever increasing and so much of the world's manufacturing depends on oil. We have to develop and implement alternative fuels today.
What happens it passes $4 a gallon (next week most likely!) maybe people will FINNALLY get off their silent complacent rear ends and DO SOMETHING, anything.... we need to stop being the silent victims of big oil, big auto, big gov and take action and speak up!
We wouldn't need all that oil if we didn't have the urge to consume so much. All we do is consume - oil, gas, food, disposable electronics, packaging...... We will perhaps one day be living in more of an old-world localized economy, where things were built to last, and purchases were fewer and far-between. I had a garage sale last weekend and it was unbelievable - the amount of shit I had sitting in boxes.
Get ready for significantly higher interest rates and rampant inflation (we are already starting to experience the inflation piece). The official US government policy after 9/11 of "go shopping" was the most idiotic thing to say (and was of course spoken by an idiot). The US economy is heavily in debt and continues to run massive deficits. We spend more of our national budget to pay interest on that debt than we do to fund the military, which we in turn spend far more on than education. Anyone that thinks that's OK must have flunked economics and basic math (probably due to lack of funding for those classes). We have enjoyed economic excesses made possible by massive borrowing and cheap credit. Now the bill is coming due. Trying to create more cheap credit now just makes it worse in the long run, and far worse for the next generation.
Growth cannot be infinite in the confines of a finite system. Our view of economics and sense of entitlement needs to take a significant shift to start recognizing that. As with the housing bubble, we are over-due for a correction of our economic excesses.
Current gas prices in Vancouver, BC: $1.31 CAD/liter. We're geographically quite close to the US, as you might imagine. According to Google's automatic unit conversion, I come up with "1.31 (Canadian dollars per liter) = 4.93421896 U.S. dollars per US gallon".
$5/gal gas is pretty much here already. Other than a bit of local bitching about the price, and some increased cycling and transit ridership, not much has happened.
Footnote: IIRC our price about a year ago this time was $1.10/liter, two years was $0.95/liter.
I think is easier for America to go to war for oil than quickly slipping into a low consumption model or viable alternative fueled one. It's history.
Don't worry about $7 a gallon. Most of the world pays that now.
Wait til it gets to $30 a gallon.
You wont need to wait that long either.
how will the million acres of grass get mowed at that price, i am allready telling my grandfather that mowing is getting expensive. but all he sees is a few bucks to fill the rider. but even yard jobs is small pennies compared to the everyday needs of the people for fuel
My husband and I are flying home to visit family this summer and our biggest expense (besides flying from Asia to america) will be fuel.
Fuel is at 1,690 won a liter here in Korea, which is about $7 a gallon. When a huge dump truck almost killed me in our car we decided that it's better for the environment, cheaper, and SAFER to ride our bikes everywhere. Take a towel and drink some water.
I think Shaun said it way up top - the UK is already paying this sort of price and consumption is still going strong. This is not an elasticity of demand issue - we need to get around and we need to use oil to do that. The analogy is the same as - sure I can lose a few pounds but at the end of the day whatever the price of food rises to I will pay it - not eating is not an option. The same applies to transportation - staying home and not going to the office is not a sustainable option.
This has been a great lively debate - so nice to read everyones perspective.
Cheers - Eric - PickupPal.com
This will happen. Count on it. New tech will help, and we will all learn to ride a bike. The Euro analogy, and the bunch of tripe in it, is not an accurate analogy, and full of holes too big to bother with...
This will happen. Count on it. New tech will help, and we will all learn to ride a bike. The Euro analogy, and the bunch of tripe in it, is not an accurate analogy, and full of holes too big to bother with...
Not just in the UK fuel prices are already $7 a gallon. In most EURO based countries 1 liter is already more then 1.20 Euro. In countries such as Holland, Belgium and Germany already above the 1.5 Euro a liter make it almost $9 a gallon.
Here is a list of Euro countries and their pricing. The first price is the price of a liter regular, 2nd super (98) and last colum is diesel.
Belgium 1.531 1.540 1.331 €
Germany 1.455 1.534 1.382 €
Finland 1.445 1.473 1.274 €
France 1.384 1.422 1.291 €
Greece 1.141 1.306 1.124 €
Ierland 1.207 1.246 €
Italy 1.403 1.495 1.446 €
Luxemburg 1.230 1.244 1.138 €
Nederland 1.591 1.645 1.357 €
Austria 1.241 1.353 1.248 €
Portugal 1.409 1.554 1.265 €
Servië 1.180 1.200 1.160 €
Spain 1.156 1.269 1.245 €
If multiplied by 5.8, you get the current price of a gallon in US$.
The prices of gasoline haven't changed that dramaticly in the past few months, since the price of a barrel is in dollars and the dollar lost a lot of it's value compared to the euro. Meaning these prices have been around for a few years already.
I think the general mindset of the US people has to change rapidly. Start by looking for work closer to your home. Or A home closer to your work, whatever is easier to realise.
When I was in college in 1996 I went to the UK for three weeks. I noticed immediately that the majority of the cars people drove were tiny: little Citroens and Vauxhalls that made the VW Beetle look like a full-size station wagon. I wasn't driving while there, but as soon as the lady I was staying with stopped in at a petrol station one day while we were out, it became blatantly obvious. Gas there was already over $4 a gallon! While talking with a bus driver, he mentioned that many buses and delivery trucks were already starting to use canola oil as an alternative (rapeseed fields everywhere), which explained why the large vehicles would go by smelling of french fries.
Seeing where things were headed after getting home, I started changing my lifestyle and going green. We've done nearly all the pre-solar improvements to our home already, and plan to go solar as soon as we are able. We will be changing out our two Subarus for more fuel-efficient cars (hopefully electric), and our long-term plans include retiring in a super-green house that may even be off-grid entirely. I dream of a plug-in electric car charged by my own solar/wind power.
Gas has not yet passed $4 here yet, but it's nearly there. It's already had a huge impact on our travel. We don't take the 5-hour drive we used to for vacation, and have cut back on lots of other driving. We're also trying to keep our cars in better shape to improve their efficiency.
I disagree with the first blogger.
Supply and Demand- Yes - meaning we have already reached our peak consumption versus the amount of quantity supply
b- Demand is getting higher not lower
C- All new found oil still must be sold on the world market - even alaska
D- We import most of our oil from Canada
What I still don't get is why US automakers still refuse to bring their already more efficient Europe-only models over to the the US?????? I'm thinking Ford Mondeo and others. These models are proven to be more efficient, have more engine choices, etc. Is it the fault of lazy executives and the US Department of Transportation?
German automakers seem to bring their models over here with little problem (although our engine choices are not even close to what is available in Europe). So if the US auto industry wants to stay afloat, they need not look any further than their international branches of the company.
===author's response follows ====
I think the answer is that we dumb Americans are glad to pay top dollar for useless horsepower, status conveying size and weight, decals, fins, spoilers, and so on, making the behmoths far more profitable than much smaller cars lacking those things and which have value more aligned with functionality.
Start practicing.
teach your children to ride bikes and horses... prepare them for a future without oil in the tank of a car!
Those who are pointing out how much more expensive fuel is in Europe and the UK - there's a big reason why that isn't so important.
They have better access to rails, more dense, walkable communities, and they're already used to using these as their main forms of transport rather than their "alternatives", as we like to call transit and rails in the US. The average vehicle miles traveled in the EU is far lower than the average VMT in the US, so that $8 per gallon still translates into less as a proportion of income than the $4 per gallon in the US.
What I think will happen is what's already happening: People in the suburbs will stop wanting to live there and start competing for urban housing. Businesses in the suburbs will stop wanting to work there and start competing again for urban office space. Our depreciation in home values in the suburbs will not be matched by appreciation in the core, but the core will remain steady or gain some.
We will build transit systems. The existing transit systems will be modernized and expanded. We will build new renewable power generation, and we will learn to use less electricity. I hear from a lot of people that our "grid can't handle" trains - that's ridiculous, you're talking about the equivalent of a small housing development for bullet trains, and less for local service. We build that onto our grid all the time.
We will learn to accept a slightly lower standard of living, and we will start to manufacture goods for the rest of the world again.
Lester Brown's online book Plan B 2.0: Rescuing a Planet Under Stress and a Civilization in Trouble has an excellent discussion regarding peak oil and the future of an oil based civilization.
my 2cs are that a lot of powerful people in the oil industry and government (which are often one in the same) have known about this for a long time and have squeezed as much profit out of us and now they will slowly introduce alt. energy sources and better vehicles always at our expense. the future of life is not about keeping independent motor vehiclists on the roads, but rather cooperation and planning to survive the transition from oil to something else.
I would love to move closer to work to avoid fuel prices, except I work in downtown NYC and currently live in the suburbs. If i were to move 40 miles closer the cost of a house for me and my family would be in the several millions. Also I probably could not sell my house for as much as I would like due to the downturn in housing market so instead I would live in a cardboard box in an alley. Hopefully by the end of this week I will have my CNG 1994 Ford F350 4x4 with a 460 big-block and 5 speed manual which may sound like not green car but with CNG at around 40-70 cents a gallon and the truck has a 400 mile range and limmited smog emissions It seems perfect for me to avoid the high fuel these days and still haul our dirt bikes.
all I have to say is... "who killed the electric car"
Hooray for expensive petrol! Yeah! I think its awesom that all you petrol guzzling bastards will find youself in the poor house. get a bike, take the bus, the train. walk. get over it.
Hi Switch to CNG !
How will you be filling your truck? Can it run on either gas or CNG?
I have natural gas in Brooklyn, do you need a special compressor? I wonder how many of those trucks and cars are out there? They are usually 'fleet vehicles' for companies that have the pumping equipment on site.
I know it burns very clean.
I hope this spike in oil gets more and cheaper alternative energy products to market. I mean, follow the money, if someone can build a better solar/wind/hydro mousetrap, the (educated) world will beat a path to your door, and Joe Sixpack will eventually follow.
Good Luck!
vsk
i think all of this is great. but i have to agree with RC. i live in phoenix, where mass transit is virtually non-existent. i can't move out of my house because the market is down, and if i tried to move closer to work, i would be spending nearly 10 times my income. now, i do think that phoenix is light years behind most cities in terms of responsible transit...so i'm very curious to see what happens around here. especially since, SUVs are standard and it's not uncommon to commute 30+ miles one way to work everyday...oh! and for those that don't live here, that usually translates into about a 75 minute commute...each way.
i wouldn't praise the rise in gas prices though. granted, i drive a 1969 beetle which affords me about 35 mpg. so my weekly fill-up costs me $18-23. but until auto-manufacturers bring a more efficient car, it's still gonna hurt everybody! so as i see it praising a rise in gas prices, is like praising that you just got your wallet stolen and celebrating about it. but i do agree, something needs to be done very sooner rather than anytime later.
Interesting idea! Anyone hear the whisper of a revolution? Taxes on tea and hardship of the gas prices! The situation basically effects the poor I have an old Honda accord 1999 with 181thousand miles on it which gets 30 miles to the gallon I went car shopping two weeks ago the best milage I could find was a Toyota Yaris at 35 miles per gallon! Oh I don't have 21thousand to buy a Prius. I travel 60 miles return to work and am considering changing jobs because of the cost of transport. Of course most of our readership here will have considered the effect on the earth of such activity but the average american is only worried about the next few cents.
Renewables will be more popular even if it means using solar to power the house so we can still buy gas to get to work! I genereated my first electric 120v light this week using solar which was cool but with the cost at least $5 a watt I couldn't afford to save the earth at the moment which I find annoying! How can we make the cost of alternatives lower so that those of us who want them could afford them. I heard a rumor this week that state police are supposed to be stopping SVO power vehicles for tax evasion I hope it isn't true but some how we could be going towards a U.K like system of paying excise tax on our cooking oil use in our cars!