The price of crude oil recently reached a 10-year high of $37.20 per barrel. Oil prices have been rising steadily over the past two years, and the impact of this is beginning to be felt in many areas of the economy. Gasoline prices are on the rise, for example, which impacts both individual consumers as well as transportation industries. Other industries, such plastic manufacturers, who use oil in other ways are being similarly squeezed. There is an expectation that business profits will begin to suffer as individuals rein in spending to offset price increases throughout the economy.

Given the pride that has been taken in America's recent economic success, this has become a major political issue. It is all the more pressing as winter approaches and households (especially in the Northeast) gear up for expensive heating-oil bills. Add to this the November Presidential elections and you have something that is increasingly billed as a crisis. Some questions therefore arise:

Why are prices so high? Largely because OPEC, the Organization of Petroleum Exporting Countries, decided not long ago to limit the amount of oil they pump, thus causing prices to rise. It should be noted that the U.S. is a large oil producer, but we currently pump only about 5.85 million barrels per day, about one-quarter of the nation's daily consumption (and a 50-year low by this measure). Any move by OPEC, therefore, has important repercussions for US consumers.

Are we actually in a crisis? It depends on your point of view. Americans are used to cheap gas and generally consider it a fundamental right. This is clearly ridiculous. By the cheap gas measurement, the answer to the question is you betcha. However, other countries (such as Britain, where taxes account for some 72% of gas price, making it very expensive indeed) are suffering more. The home heating oil cost spike is most troubling, since everyone needs to heat their homes, rich and poor alike, and the poor are much less able to absorb the cost.

What is being done? President Clinton has urged OPEC to raise their production, and Saudi Arabia has championed this. It will, however, take some time for this to actually bring prices down for the consumer.

What can be done? The Presidential candidates have put several proposals forward:

  • Al Gore has suggested that the government release oil from the Strategic Petroleum Reserve. This, he hopes, will provide quick price relief. However, The US consumes 20 million barrels per day, and under Gore's plan oil from the SPR would be released in 5 million barrel increments—hardly enough to offset the recent price hikes. He has also proposed that the government issue tax credits to oil suppliers, hoping that some of this savings will be passed along to home-heating oil customers. Again, it seems unlikely that this will have much impact. He has also accused the oil industry of "profiteering," which makes for a good political speech but accomplishes nothing.
  • George W. Bush has suggested that America reduce its dependence on foreign oil by increasing exploration and production at home. Given that the US is at a 50-year low in domestic production, and that much of this decline has taken place during the Clinton administration, this makes some sense. But once again, this is more electioneering, and not a short-term solution.

I believe that the best course of action is to continue operations on the foreign-policy front, using our bargaining clout more forcefully than we have to date. Tapping the SPR, which I think is contrary to its stated policies, would likely be ineffective given the small size of the proposed injection. Another option would be to suspend the federal gas tax, which currently stands at 18.4 cents per gallon. In this regard, it is useful to note that the Omnibus Budget Reconciliation Act of 1993 raised the federal tax on both gasoline and diesel fuel by 4.3 cents/gallon, and while this money was originally to be used for deficit reduction, it has instead been used to fund highway programs.

But I also think that market forces alone can set things to rights. America needs to consume less oil if it wishes to gain some freedom from oil-price shocks. This can be accomplished in the short run by conservation—if you don't like the price of gas, drive less—and in the long run by developing promising alternative energy technologies such as fuel cells (for autos and homes) and microturbines. I'd also like to see a way for the average consumer to stock up on fuel when the prices are low (outside of the futures market). When I come up with a solution to this difficult problem I'll let you know.

Oil crisis, schmoil crisis; gasoline is still cheaper than milk

(or, why the sky isn't falling (again))

Yup, it's true; gasoline is cheaper than milk. In fact, gasoline is cheaper by volume than practically any liquid you can buy in a grocery store, including (bottled) water. Here are some numbers, in US$ per gallon:
Date   Belgium  France  Germany Italy  Netherlands U.K. U.S.
------------------------------------------------------------
1/1/96 3.95     3.93    4.07    3.89   4.32        3.20 1.27
1/6/97 4.21     4.01    3.83    4.18   4.29        3.74 1.41
1/5/98 3.47     3.51    3.30    3.57   3.59        3.78 1.29
1/4/99 3.52     3.58    3.34    3.63   3.77        3.83 1.13
1/3/00 3.34     3.57    3.52    3.54   3.78        4.17 1.46
7/3/00 4.01     4.14    3.79    4.04   4.40        4.88 1.79
9/18/00 3.47    3.70    3.47    3.63   3.91        4.24 1.73

(reference: U.S. Department of Energy
 http://www.eia.doe.gov/emeu/international/prices.html#Motor)
For comparison, a gallon of milk goes for about $3.40, and a gallon of Coca-Cola goes for about $2.00.

What are the numbers telling us? Mainly it's telling us that it could be, indeed has been, worse, particularly in Europe. In other words, this crisis is seriously overblown. We survived higher prices earlier this year, we survived them in previous years, and we'll survive them if they continue to rise this month (which is debatable by itself--NPR's Marketplace is reporting that crude oil prices fell today). Rhetoric from the U.S. Presidential candidates notwithstanding, the sky is not falling. I think much of the perception of crisis is due to us having been spoiled by a long run of cheap oil. Nevertheless, we all knew the party had to end some day. It's time to suck it up and deal.

I am troubled by all the panic politics surrounding the oil issue this year. We've seen talking heads on the TV propose releasing the strategic oil reserve (Hello? That's supposed to be for real emergencies, like an embargo), cutting the nickel-a-gallon gas tax (math quiz: what's the largest effect that could possibly have on the price of gas?), and tax credits for oil companies (like consumers will ever see any of that; haven't these clowns ever heard of elasticity of demand?). Of all the proposals, improving domestic production might be worthwhile in the medium term, but that is something that needs to be judged on the costs and benefits of exploiting those oil fields, not as a panic response to this tempest in a teapot.

Developing alternative energy resources would be a very forward-thinking program, but to be honest I think this non-crisis will have zero effect on alternative energy research. The problem is that practical alternative energy is at least a decade away. We won't even remember the "crisis of 2000" by then. As with exploring additional petroleum reserves, it's a decision that has to be made on its own costs and benefits, not on its purported effect on fuel prices today.

The problem I see with alternative energy research is that right now it's cheaper to go the petroleum route, and petroleum pays off in the shorter term to boot. That means that developing alternative energy is going to require a strong political comitment; economics alone won't do it. Given the generally spineless leadership we've come to expect from the two major parties in the U.S., I'm not optimistic about our chances of mustering that kind of political will any time soon. I think the oil situation will have to get a lot worse before we'll see a serious push for nonfossil fuels in this country.

And that's my $0.02 (0.0116 gallons of petrol, evidently).


re: thopkins' comment: the proposal was only to repeal part of the gas tax, not the whole thing. See, e.g.
http://www.gtconnect.com/2000/gtonline_news0331/headline/gtheadline-01.html

Actually gas tax is not a nickel a gallon as you say, you're WAY off. I think in the US it's like 60 cents a gallon since it's federal and state and sometimes local. Other countries have it much worse. Some of the other reasons gas prices have gone up in the US is because there isn't enough refining going on since the environmentalists get refineries shut down. Also, they block efforts to drill oil in Alaska, if we have more oil directly from home we won't have to put up with OPEC. And I also don't understand the economics of raising gas prices because there isn't as much supply. People still need gas no matter how much it costs. Yes, people may drive less, but most driving is done for buisiness and must be done one way or another.

The problem with rpl's writeup above claiming that petrol prices, in US$, have actually been higher in Europe for some time before now is that the value of the Euro has been dropping. Steadily. More or less since it floated against the US$. The Euro started life at around US$1.05 to the Euro and is now hovering at around US$0.86 to the Euro.

What this means, for the overly America-centric around here, is that the real price of petrol to the man on the street in Europe has increased at least 30% since 1998 even if the US$ price of petrol in Europe stays the same.

I do heartily agree with rpl's statement on how gasoline is cheaper by volume than any liquid you can buy in a grocery store. Oil - a non-renewable resource - is cheaper than bottled spring water, a natural resource that regenerates itself from rainwater.

What does this mean? My take is that the price of petrol is still not high enough to warrant research into alternative energy sources. It would take an increase in the price of petrol of the order of at least two or three times from today's already high prices to force a rethink in policy.

But the world is still drunk with short term benefits, high on cheap oil.


In the end, the solution to higher prices is higher prices.

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