Fears of a market freefall subsided to some extent on Friday as the Dow Jones and its fellow indexes soared into once familiar territory. Though common consensus suggests the markets have reached their bottom (at least for now) many Americans seem to be something less than convinced when paying an average of nearly $3.50 at the gas pump. As the hot spots for financial woes and profanity have moved from the bar scene to the gas stations, it is important to make sure we are yelling at the right parties for our troubles.
In your correspondent’s feeble attempt of a public opinion survey, he has been keeping close tabs on who University students are blaming most for the high gas prices. When performing such an inquiry, the majority of the answers he received were, “Beats me,” “The new gas tax,” or your correspondent’s personal favorite, “The war maybe?” Certainly, the answers were anything but homogeneous, but if there was a single communality it was that they were upset.
It is something of a universal truth that anger with no enemy can lead to, to put it mildly, misguided actions. Hence, it became a mission of your writers here at St. James’ Street to help create a face for the gas price pandemic.
Though such a lesson to some may be elementary, it is important to start with the basics when addressing such an issue. In a recent press conference President George W. Bush was asked why gas prices were so high. After a short moment of bewilderment the President responded by saying, “The majority of the gas price depends on the cost of crude oil.” Well, not a bad answer George, but you’re say, only 2/3 correct. True enough; about 2/3 of the cost of gasoline is derived by the cost of crude oil. It then becomes no surprise that crude oil prices hit a new high on Friday reaching $116.97 per barrel.
So just how high are gas prices historically? Since 1950, real (meaning adjusted for inflation) U.S. gas prices have been trending downward with three major exceptions. 1) The OPEC oil embargo in October 1973 (where gas prices reached approximated $2.40 in today’s dollars). 2) The start of the Iran-Iraq War in September 1980 (where gas prices reached approximated $3.30 in today’s dollars). And 3) present day. Upon first glance it seems that our current meddling in the Middle East is responsible for the current hike in gas prices. Upon further review however, it seems that the war in Iraq is not the primary suspect for blame in today’s case.
Presently, the United States is responsible for more oil consumption than any other country, and for that matter, we consume more than the second, third, fourth and fifth largest consumers combined. However, that ratio has been getting smaller. Just as Americans began the post-Sept. 11 stage of mourning, China was about to rocket into an economic boom. China has become one of the largest consumers of commodities in the world, and Americans are feeling the effects across the Pacific. Since the collapse of the Soviet Union, the United States has enjoyed little competition in the demand for oil. However, it seems this luxury is coming to a close as China and India are just tapping in to what will be a staggering demand curve; not to mention, Russia is posed to make an economic comeback tour. Additionally, the United States imports more oil from non-OPEC countries than OPEC ones. The United States imports most of its crude oil not from Saudi Arabia, but from Canada. For those of you who are still unconvinced, oil imports from Iraq (which make up only roughly 70 percent of our total imports) have remained relatively flat over the past 10 years.
So why are gas prices so high during the summer? Each year from May 1 to Sept. 15 the Environmental Protection Agency demands that refiners formulate a product with a lower Reid vapor pressure in order to help curb air pollution. In any case, high summer gas prices are largely attributed to this switch to “summer gas” in the interest of environmental health.
Contrary to public thought, Americans are actually demanding less gasoline than they have in previous years. So when demand falls, prices should fall as well right? Anyone who has taken an economics course could tell you that gasoline is relatively inelastic (meaning demand fluctuates little with prices changes) so more Americans driving more efficient cars or biking will do little to curtail the travel costs of those who still opt to drive SUVs.
A positive side effect has emerged from high gas prices. The go-green movement has (besides hooking your correspondent up with a free sandwich on campus last Thursday) helped spur investment in clean energy companies in record numbers. Currently, the buying of stock in solar companies has shuttered little with financial struggles on Wall Street as new firms such as First Solar Inc are priced at over 140 times earnings.
As it seems, Americans are searching for alternative energy sources, the fact sill remains that we will most likely never see oil prices fall below $85 a barrel again. An Oil Executive reportedly once commented, “Considering the many production uses for Petroleum, burning it for fuel is like burning a Picasso for heat.” Although probably more witty than factual, it does help Americans realize that we all have had an unrelenting addiction for oil. So if you find your blood pressure rising as fast as the price meter, while filling up at the gas station, just remember things will not get any easier by squeezing the handle harder.
Those at St. James’ Street welcome comments at [email protected].
