Finally, Enough Pain to Produce Some Gain
Well, it finally has happened. The price of gasoline has increased enough to cause pain to Americans so that they are changing behavior. The approach of $4 a gallon gasoline has, in the last month produced two positive results. First, after gasoline consumption increased 1.4% in March over the same month last year, it declined 0.6% in April. Second, ridership is up on mass transit systems around the country, in some cases by double digit amounts. The Minneapolis-St.Paul light rail line has increased ridership of 16% year to date over last year, and the Miami rail ridership is up 13% year in first quarter but an impressive increase of 28% in April
As regular readers of this column know, I have long predicted current oil prices. In April 2006 I predicted $125 a barrel price for February 2008, so I was off by two months. Also in that month I predicted $137 a barrel price for April 2009. I now think that might be low. In a recent column I predicted that the trading range for oil for the next 18 months would be an unlikely low of $95 and an elastic upper range of $135. I see many trends and market conditions that point to a trading range of $125-175 between now and the end of 2009. In other words, get used to today’s prices being the normal or the low normal.
America has 5% of the worlds’ population but consumes 25% of its energy. The numbers are even worse when it comes to gasoline. We consume 44% of the world’s gasoline. Energy scientists generally believe that the most important, immediate effort in the effort to stem global warming is conservation. It is predicted that across the board conservation would lover energy consumption by 20% relatively quickly. If you apply that math to gasoline consumption, we could quickly drop our percentage down to 35% of global consumption. Of course, China, India and the other rapidly growing economies would help us attain that number as their consumption is increasing.
I am still struck by how many people I meet that think this price increase is a painful yet short term price spike. The longer one continues to think that, the more economic pain one will feel. It has been two years since we first crossed the $70 a barrel price. If we had allowed that pain to change behavior we would now be better off as a nation. It astounds me that U.S. automotive companies continued to produce an excess number of pick-up trucks and big SUVs. Why? Because they could make more profit per vehicle. This of course is no longer the case as buyers for such vehicles have disappeared. It is even hard to trade in an SUV now as the value in the used car market has plummeted. Yet, it will still be cheaper to trade it in and buy a smaller, hybrid vehicle as gas is only going to go up or at best level off in price. When it costs $100 for a tank of gas, and one fills up once a week, the cost is $5,000 a year for fuel. Trade in your gas guzzler now, or please stop complaining about the price of gas.
To put this in perspective, there are dozens of countries with significantly higher gasoline prices. What do most of these countries have in common? They all have much smaller vehicles and much higher percentage use of mass transit than in the U.S. $4 a gallon gas is beginning to change behavior. It will be interesting to see how much more behavior is changed in the next 12 months when the price goes to $5.
My personal frustration is that, having lived with the certainty that oil would reach its’ current price level for a couple of years, it feels as though I am living a deja vu life. I am so tired of the daily alarmist news reports each evening about the price of oil. Get used to it folks. Drive less. Drive a smaller car. Use mass transit. Carpool. Plan your transportation life around the expectation that the price of gas will go up from where it is today. It will.