Archive for June 7th, 2012

Angry about gas prices?

In April the GOP theme was clear: blame Obama for high gasoline prices!

Probably not.   If you’re like me, you’ve been watching them fall daily, from a high of $4.00 per gallon in early May to $3.55 in Farmington today (down from $3.59 yesterday).    Yet it wasn’t that long ago that Republicans from Mitt Romney to John Boehner eviscerated President Obama on high gas prices.   They rose because of his policies towards oil companies, his foreign policy, or the lack of domestic drilling.

But, Democrats complained, the President doesn’t control gasoline prices?   Hogwash, was the reply – Obama’s policies are one of the main reasons that they are high — and look for them to get higher this summer!

So what happened?

To be sure, some media sources blamed Obama more than others!

Remember back in 2008 when the economic crisis hit energy prices went way down.    Within less than a year we fluctuated from $160 a barrel to $35 a barrel.   The reason is simple:  oil supplies are pretty stable in the short term, and demand is generally price inelastic.    This means that if demand exceeds supply at a particular price, large price increases are necessary to reach a new equilibrium point.   In the booming economy of 2006-07 oil demand world wide went up, while supplies could not increase.   The result – a spike in oil prices.

To be sure, speculation did accentuate that, but that speculation was based on a belief that demand would continue to exceed supply and oil prices would continue to rise.    Of course, if demand falls dramatically, the opposite happens — oil prices go way down.   Unless supplies are cut, a drop in demand can mean a steep drop in price to reach a new equilibrium.

This graph was from March – from a guy named Andrew Butter on the investment website ‘seeking alpha’ – predicting the oil bubble would pop

Perhaps what we saw earlier this year was an increase in oil prices due to a belief that economies were starting to move out of the recession and that oil demand would again increase.   Add fear of a war with Iran (fears which have seemed to subside since then) and its not surprising that oil again went above $110 a barrel.

However, now it’s down to $85, and seems to be settling in at that price.   Yet all the people who were blaming Obama for price increases are not crediting him with bringing the price down.   Clearly that was an opportunity attack – if something goes wrong, anything, blame the President.   If it starts going right, look the other way.

To me the question becomes: are we in a cycle whereby every time the economy starts to show life, oil prices will rise, ultimately stifling the economic progress?   With lower oil prices we might get another burst of economic growth in the second half of 2012 — perhaps leading to another jump in oil prices which thwarts the recovery.

If so, we’re in a conundrum that requires either increased oil supplies or an increase in the use of alternative energy sources.   Unfortunately, it doesn’t look like oil supplies with increase soon.

Despite a slow economy, oil demand appears certain to keep rising, while new discoveries decline.

In Europe, there has been an intense effort to invest in wind turbines, solar panels, and a variety of other sources.  The Europeans say the future is with electricity, and they are bent on discovering how to efficiently generate electricity without fossil fuels.   They’ve made a lot of progress, which is why they were able to meet the Kyoto accord goals.

Some might point to natural gas and oil shale development in the US and Canada.   Those sources could potentially add to the oil supply, but on a time frame out that is too long to help in the near term.

This means that as we work through the financial problems, the debt crises in Europe and the US, and all the concerns about infrastructure and economic rebalancing, energy is a main barrier to change.   The last century was the century of cheap oil, our lifestyle, our global population boom, our expectation for easy access to goods from all over the world was built on cheap oil.   We’ve electrified and powered every aspect of our lives, from our homes to our appliances, lawn mowers and tools.

If the era of cheap energy is ending, our economy will never get to what one would have in the past called “normal.”    We’re destined to years of economic malaise, only to end when we both work through the debt crises, get banks back under control, and find a way to keep energy costs down.    We should be investing in all sorts of alternatives, like the Europeans are, but instead our stagnating, with Congress unwilling to act, and politicians enamored with a failed “free market” fantasy that markets can magically take care of everything.

Indeed the future might be won by whoever develops sustainable alternatives first and adapts their economy to use them.   In that, we’re already way behind.