May 2008

It would be nice to have President Bush step up to a podium and admit that while the country as a whole is not in a recession (though close) he realizes every individual is in their own personal recession. Oil prices are higher than they have ever been, and effect the price of everything else we purchase as well. Almost everything in this country is shipped via truck. While trucking is an effective means of transportation, it is not not efficient as train or cargo ship. Over the past couple of decades we have become used to getting things we want now, and shipping via train or boat takes a lot longer than truck. In the mean time the extra cost of hauling everything has been or will be passed onto the consumers. Every good bought at the store is going up in price because of gas prices. Add to that the actual increase in gas prices and we are all in our own personal recession. President Bush of course could not say recession even if referring to individuals because our economy is based at least partially on consumer confidence. It's irrational that the mention of a word can have such an impact on the entire country, but people as a group don't act in a rational manner. I read articles every day about why the price of oil is doing what it's doing. People seem to have this need to understand the price of oil even if the reasoning isn't logical. While I am no economist and not an expert on the oil markets I would like to do a little thinking out loud on the price of oil.

Why high oil?

The most common arguments for the price of oil are supply/demand and the falling value of the dollar. If we look at the value of a dollar from 2000 when oil was quite a bit cheaper that same dollar in 2007 is worth $1.23. It is probably safe to say that by now in mid 2008 that it would be worth $1.25. The price of oil in 2000 was $27.39. So to account for inflation all we have to do is multiply that by 1.25 and we get a price of $34.23.

Then we have to take supply(capacity)/demand into account. In 2000 supply was 78.9 million barrels per day and demand was 75.6 million barrels per day, a cushion of just over 3 million barrels. In 2008 so far the supply is 86.8 million barrels per day and demand is 86.8 million barrels per day. We have no more cushion on the supply side. Does this lack of supply justify adding almost one hundred dollars to the price from 2000 (currently oil is over $130)? Right now the speculators would tell you that of course it does, the issue is lack of supply and increased demand.

I have no doubt that the price of oil right now needs to be high to curtail demand, but does it need to be as high as it is? Consider for a moment if oil is a bubble and did burst and the bubble was so large that gas was at $2 or less, wouldn't that be great?

All the inflation going on because of high prices for truckers would disappear. People would save hundreds of dollars in gas every month, the dollars value against the Euro would balance out. All those jokes about something costing $1 Canadian being like twenty cents american would actually work. People could go back to driving those huge SUVs and trucks (there's a lot of used ones out there for cheap right now). The automakers could divert a lot of that R&D research to adding more cup holders and other do hickies to the interior of our vehicles...

Why we need high oil

If there's anything we've learned from history it's that we don't learn from history. People actually had to line up to buy gas back in the 70's and when gas became cheap again everyone ditched their small efficient cars for huge inefficient vehicles. The market demanded it and the automakers were more than happy to provide. With gas being so cheap the automakers did little research into alternatives, in fact GM actually killed an all electric car once California reversed it's decision about electric cars back in the 90's.

Of course now there is huge incentive to produce cars that get better milage or don't use gas at all. The Toyota Prius sells more than twice as often as the new retro Ford Mustang. Tesla is finally selling their all electric sports car. GM is full speed ahead on projects like the Chevy Volt and the Fuel Cell powered Equinox. There are diesel engines coming out soon that will yield ~25 miles per gallon on the highway in a full size SUV/truck. GM and Chrysler are working on a hybrid powertrain that when coupled with their V8 engines that can shut down 4 cylinders produce a 40% gain in fuel efficiency. GM is also leading the way for R&D on gas engines that are 30% more efficient...

All of these things are on their way to production or are getting a lot of R&D money to put them into production as soon as possible. Right now the company that gets the more fuel efficient car on the road gets a good portion of market share. If gas suddenly becomes $2 again the market won't care nearly as much about fuel efficiency.

That flow of cash into fuel efficiency will turn to a trickle. Some of the technologies will come to market while others will not. Automakers would be less likely to follow up on concept cars like the Jeep Renegade, the Tesla Roadster would become a novelty, and the Prius would go back to being a car for the pretentious hippies that like the smell of their own farts instead of being a sensible vehicle.

We'd be an economy that is stuck on oil for a while longer and when it became expensive again we'd all bitch and moan about the price of oil while we drive around in our trucks getting 15 MPG.

Oil can be cheap again some day, really cheap. But we need to get there by having options like all electric, gas, diesel, fuel cell, etc. to choose from when buying our next vehicle. And we won't get there unless oil stays high for a little bit longer.