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Gas Prices

I must say that I don't really grasp the expensive oil panic that seems to be lurking around the journalistic, blogospheric, and even policy worlds at the moment. I understand clearly why individual purchasers are displeased to see their gas bills high (and don't get me started about the heating oil this past winter) but in broader economic terms its hard to see the looming crisis here. The adjustment to a period of higher prices will be difficult, especially since it comes in the context of a shitty labor market. But the real culprit here is the shitty labor market. That will, one hopes, end at some point. If it doesn't end, things will be shitty no matter what happens with oil. But are these high prices really something that should be an independent source of economic concern? I don't see it.

As this chart from Angry Bear shows, real gas prices, while quite a bit higher than those of the late 80s and 1990s, are not only way lower than during the late 70s-early 80s peak, but basically about the same as during the economic salad days of '48-'73. What's more, the energy intensity of the economy (amount of energy consumed per dollar of real GDP) is way up since then, and overall incomes are higher. A shift toward an era of higher prices strikes me as something we should be eminently capable of coping with. Probably fewer people at the margin will buy SUVs and pickups, more will buy hybrids, light truck engines will get more fuel efficient, etc.

April 12, 2005 | Permalink


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» Topic of the day: oil from City Comforts Blog
Matt Yglesias wonders why some bloggers worry about yglesias.typepad.com/matthew/2005/04/gas_prices.html">Gas Prices The panic around the blogosphere is because bad news sells. But the important thing to remember about "peak oil" is that the downhill s... [Read More]

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$50/BARREL OIL....Yesterday Matt Yglesias mused out loud about high oil prices:I understand clearly why individual purchasers are displeased to see their gas bills high (and don't get me started about the heating oil this past winter) but in broader ec... [Read More]

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Can anyone say ... nuclear? [Read More]

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Tracked on Apr 14, 2005 3:54:06 AM


Doesn't increased energy intensity make higher energy prices harder to deal with?

Posted by: Matt Weiner | Apr 12, 2005 12:45:45 AM

Energy intensity down, you mean.

This happens everytime prices go up. But do you know something the IMF and the DOE don't?

Posted by: praktike | Apr 12, 2005 12:46:50 AM

My first new car, bought when I was a poor grad student, cost at the time about the same as 4700 gallons of gas. Using the price at my corner gas station ($2.59) thats just of $12,000. That won't buy you much today (and my Ford Fiesta wasn't much back then). I thinks that's why there is not outrage over current gas prices -- people realize that it has been underpriced for years.

Posted by: FredW | Apr 12, 2005 12:56:24 AM

The problem isn't so much with gasoline prices right now, but with the distinct possibility that even a small disruption could cause a spike to $100/barrel or more. As long as prices go up slowly, there's time to react, but if not, global recession a la 1979-80 is a very real possibility.

At this point, it's not clear what anyone can do about this. But it's a real danger, and one that would hurt a lot of people very badly. If you think the labor market is bad now, just wait until oil prices double in the space of a month.

Posted by: Kevin Drum | Apr 12, 2005 1:14:20 AM

It's less the now than the later. Peak oil is a scary thing, and when we start rolling down that hill, the spigots will cut quicker and quicker. Add that in to an ever-increasing world demand (China, India) and you've got a problem way beyond higher prices at the pump. It's just that the increasing costs are getting everyone scared that we've hit the peak already.

Posted by: Ezra | Apr 12, 2005 1:19:26 AM

Building on what Kevin said ... there's also the prospect that Hugo Chavez, Iran, and various terrorists and their wealthy Gulf patrons have a sword of Damocles called pricing power aimed at our heads. Some people may like living in such I world, but I'm not one of them.

Posted by: praktike | Apr 12, 2005 1:25:08 AM

The United States consumes about 7 billion barrels of oil annually. If oil prices rise, as they have, by $20/bbl thats akin to a $140 billion regressive (I think, could be wrong) tax except that the revenues don't go to nifty programs or reducing the deficit. While not catastrophic, that seems significant to me.

Posted by: quietstorm | Apr 12, 2005 1:30:16 AM

A nightmare scenario


An opposing view


A long time ago, we were told that every $10 per barrel of oil loses 1 point in GDP. The immediate situation is very complicated, perhaps beyond understanding, in that oil prices, US fiscal and monetary policy, and Chinese & Indian & Far Eastern export economies are probably disguising or postponing the economic consequences. It could go on for quite a while.

But I do believe a tipping point is quite near; a crash, a radical restructuring such that the US is 5-20 years will be unrecognizable.

Like I said in Ezra's comments, I connect Terry Schiavo to Hubbert's Peak and housing prices in Shanghai.

Posted by: bob mcmanus | Apr 12, 2005 1:34:52 AM

There's no sword of Damocles hanging over our head, any more than there was when the Ayatollahs took over Iran. I remember much knashing of teeth and doomsaying then. We have strategic reserves and the Venezuelan, Mexican, Canadian, Indonesian, Saudi, Omani, Iranian leadership wouldn't last very long themselves trying to bleed us to death. They and Big Oil are just maximizing profits in a Peak Oil world.

OPEC as a political tool died a long time ago.

The coming recession won't be because of oil prices (though they'll get blamed). It'll be because we've spent $600-750B on the WoT, $500B on prescription health care, yada, yada and any reasonable investor will come to the conclusion that we'll never get our Fiscal, Trade or Monetary act together.

It's only a matter of time before enough people get greedy, panic, or an external event kicks it over.

Posted by: Steve | Apr 12, 2005 2:42:37 AM

It isn't just about cars. Oil is a factor of production for nearly everything we use. The computers we are reading and typing on are made with numerous petroleum products. To point to something seemingly absurd, the price of CD jewel cases has gone up about 30% in the last year because of the increase in oil prices. Sure, there are less expensive substitutes, but find one that does not have oil somewhere in the manufacturing process. I'm hard pressed to find anything I use on a regular basis that does not have petroleum product somewhere in the chain, be it as a raw material or simply as a fuel to provide transportation. I believe that is a source of the oil panic that Matthew refers to.

Posted by: Rik | Apr 12, 2005 2:54:40 AM

One more thought - even if people don't believe in Peak Oil (reserves are maxed), it is pretty clear production is not going to exceed demand anytime in the next few years. OPEC/Big Oil has figured that out. They have zero incentive to develop overcapacity now.

Posted by: Steve | Apr 12, 2005 2:57:43 AM

In round numbers, the average car in america uses 500 gallons of gas a year; iirc, the average household owns north of 2 cars nowadays.

Now to cheat and shift to median, the median hosuehold income is $43K; if that household uses 1000 gallons of gas a year, and they're paying $.60/gallon more, that's $600 bucks, and damn straight they know the difference (as Wal-Marts will painfully tell you).

Now, i'm an upper income strata person, and i barely notice the difference in gas prices, although obviously at the margin i adjust to some extent, and it's true that current gas prices, per se, will not plunge the economy into recession.

But the economy is finely balanced right now, and for many households stagflation - the shitty labor market and increasing benefits costs are leading to a decline in real take-home pay at the same time that some direct, unavoidable costs like gasoline are climing in price more rapidly than inflation in general - is a reality or near-reality. Should oil prices continue to scale up, it could be the straw.

And thanks to the wonders of bush-delay economic policies, there are no actual policy levers available to us, but don't get me started....

Posted by: howard | Apr 12, 2005 3:13:24 AM

Matt - keep your eye on your mailbox. I'll be sending you my gasoline bills from this date forward.

You'll understand everything in short order...

Feel free to send any you can't handle on to Howard.

Yesterday's return trip bill? A mere $62.00

Bump up many of your consumables by 10% or so. That might be close to 3rd qtr, 2005 pricing.

Can you say fuel surcharge? Plus personal travel price increases?

Give it six months. If the increases continue, you'll get it. Even in D.C..

Posted by: Movie Guy | Apr 12, 2005 3:42:39 AM

The miraculous quantities of food, fiber, and livestock feed we produce are only possible with equally huge quantities of ammonium nitrate, which requires natural gas for production. So not only will transportation and manufactured goods go up with oil prices, but also everything you eat and wear. A doubling of oil prices _will_ cause a recession, as it did in 1973 and 1979.

Conversely, falling prices lead to boom years, as in the 80's, when everybody: a) traded in their Chrysler Cordobas for Honda Civics, and b) started looking under every rock in the world for more oil.

If we do have an oil shock, supply and demand will eventually lead to lower prices, hopefully about when Mr. Bush's Democratic replacement takes office. But I think the low-hanging fruit has been plucked, in both exploration and conservation.

Posted by: Patrick Blackard | Apr 12, 2005 3:52:07 AM

Coal is the answer!

China and the U.S. got bunches...the gulf states got none.

There's about a trillion barrels of oil left in the ground around the world. It will probably sell at an average of $100/barrel or more by the times it's all pumped. That's 100 trillion dollars going mostly to Saudi Arabia, Iran and Iraq over the next 40 years or so. Let's hope they spend it wisely...

Posted by: monkyboy | Apr 12, 2005 4:21:45 AM

There are hard, technological, limits to how high oilprices can go longterm simply because oil is a relatively simple group of chemical compounds that can be profitably synthesised in bulk once the prices go high enough. Coal -> oil costs about 35-40 dollars/barrel, and atmospheric CO2 + H2O + Lots of Nuclear Electricity -> oil + O2 should cost around 80 euro/barrel. So price equilibriums above that are impossible.

Posted by: Thomas | Apr 12, 2005 5:04:18 AM

Who are you and what have you done with Matt Yglesias?

Posted by: Dick Eagleson | Apr 12, 2005 6:19:18 AM

Pig and human shit can make oil, though there's not that much of it.

What I think we need to figure out is how to get the energy of of hydrocarbons through some kind of step-down process, rather than using combustion. The glycolosis --> krebs cycle --> electron transfer system of converting sugar and ADP into CO2, water, and ATP is about thrice as efficient (I think) as combustion.

Posted by: Julian Elson | Apr 12, 2005 6:41:11 AM

Julian - Excellent suggestion. Mitochondrial fuel cells. I like it.

Posted by: Dick Eagleson | Apr 12, 2005 6:53:55 AM

Matt, I think you are out of your friggin' mind on this. The shit is already starting to hit the fan. Just listen to those around you. Or maybe they are not around you. But up here, in Maine, it is starting to hurt the average guy and starting to him bad. And people are talking about the pain more and more. I think you are really missing the boat on this one Matt. This is an 'oil shock' by ANY measure....prices have more than doubled in less than a year. And in every past 'oil shock' the economy took a big hit. It not only will this time as well, it IS hitting right now. Man what world do YOU live in.

Posted by: jon stanley | Apr 12, 2005 7:21:10 AM

Mr. Elson: You should cultivate respect for the engineers who understand hydrocarbon chemistry, even if they do work for oil companies. If a factor-of-three efficiency gain were there for the taking, it would be taken (Sturgeonian conspiracy theories notwithstanding). So your speculation can be disproved, as a practical matter, on sociological grounds alone.

Turning to the physical sciences, there is the matter of conservation of energy which dictates that the amount of energy released can depend only on the initial and final states, not on the details of the path taken.

Posted by: sammler | Apr 12, 2005 8:40:48 AM

Yeah, well... fusion power's a cool idea that I might post blog comments about if it weren't already a popular idea, and engineers have been working on that for a long time. Perhaps scientists/engineers are already working on my idea, but haven't cracked the nut yet :^).

Posted by: Julian Elson | Apr 12, 2005 8:53:57 AM

It's come up in different ways so far in this thread so let me just come out and say it: higher gas prices aren't about the cost of gasoline. It's an issue of fairness. Think about who is paying those higher gas prices and who is benefiting from the higher gas prices and you get into all kinds of interesting territory. The idea that gas prices represent supply and demand in a free market is only somewhat true, especially in the shorter term.

So yes, in the longer term

maybe higher prices will result in greater adoption of alternative fuels, and

maybe higher prices will provide the economic cushion for backwards states like the Kingdom of Saud to implement political reforms, and

maybe higer prices will have a positive effect on shortening commuting distances and limiting ex-urban sprawl, but

Let's not kid ourselves. Higher gas and oil prices amount to economic redistribution from buyers of gas/oil to sellers of gas/oil. (Yes, gasoline and crude oil are different markets.) And to the extent that our government has effective ways to influence the oil and gasoline markets (foreign policy, macroeconomic policy, CAFE standards, et al.) the current run up in prices can be considered state-sponsored and there is someone to blame.

Posted by: hyh | Apr 12, 2005 9:08:00 AM

Mr. Elson: You should cultivate respect for the engineers who understand hydrocarbon chemistry, even if they do work for oil companies. If a factor-of-three efficiency gain were there for the taking, it would be taken (Sturgeonian conspiracy theories notwithstanding). So your speculation can be disproved, as a practical matter, on sociological grounds alone.

I don't mean to misrepresent you, but is your argument really: "If it were possible someone would have done. It has not been done, ergo it is not possible"?
Isn't it possible that the economic insentive to invest in research into such a goal just wasn't present before; or that while previous attempts have failed, more efficient methods will be possible in the future?

Turning to the physical sciences, there is the matter of conservation of energy which dictates that the amount of energy released can depend only on the initial and final states, not on the details of the path taken.

You can't be serious! Have you never heard of non-conserving forces? Entropy? Carnot Engines? Tell you what: drag a heavy wooden box on a rough horizontal surface in a straight line from point a to b. Then take the same box on a much longer circuitous route from b back to a. Let us know how much work each task required.
If nothing else, a turbine with a greasy axle will give one more useful energy out than a similar turbine with a squeaky axle for the same amount of oil. I see no reason why more a efficient means of energy conversion than combustion could not have a similar effect.

Posted by: WillieStyle | Apr 12, 2005 9:12:05 AM

Yesterday's return trip bill? A mere $62.00

30 gallons @ 20 mpg = 600 miles. What do you think a 600 mile drive should cost for gasoline? What's the whining for?

To drive from Boston to New York now costs me $28 in gasoline. Four years ago, it cost me $18. Do I have a right to complain that this trip costs me $10 more than it used to? Not when a train ticket costs $89 and a plane ticket even more.

Posted by: Brittain33 | Apr 12, 2005 9:12:58 AM

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