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Falling Gas Prices = The Big Carrot?

September 12, 2006 · · Filed Under Eco-Driving, Gasoline, Oil Industry, Oil Refining, Related News 

It seems like Christmas in September here in the US. Gas prices are free-falling to levels we haven’t seen in a while. It’s such a sudden and drastic change that it’s got me wondering “why?”…

From USA Today
9/12/2006

Gasoline prices continue to tumble, almost free-falling toward levels not seen in five months.

The nationwide average for regular was $2.618 a gallon, the Energy Information Administration reported Monday. That was 10.9 cents lower than a week earlier.

“The reason prices are going down so far so fast is that they shouldn’t have been that high in the first place. Two reasons they were: fear and speculation,” says Mike O’Connor, president of the Virginia Petroleum, Convenience and Grocery Association. It represents gasoline distributors who operate about 4,000 stations.

O’Connor says $2 gasoline “is more likely than unlikely” if the Gulf of Mexico isn’t hit by hurricanes and if there isn’t a flare-up of tensions in oil-producing regions.

Read the original article

So gasoline prices are likely to be down to $2/gallon as long as there are no oil-platform eating hurricanes or a flare-up of tensions in Venezuela and Canada (or was that some other oil-producing regions they had in mind)? Wow, that sounds great… I’m not convinced this is the whole story. Letâ’s keep digging and reading’

I found an interesting article in The Australian. Reporting from Corola Hoyos in Vienna regarding the International Monetary Fund (IMF) suggestion today that the US take this trend of falling global fuel prices as an opportunity to raise fuel taxes within the US.

From The Australian – FT Business
September 12, 2006

US must raise tax on fuel, says IMF

The US, the world’s biggest energy consumer, should use the opportunity created by the recent drop in oil prices to raise petrol taxes, according to the International Monetary Fund.

This would prevent pollution and the wild swings in oil price that jeopardize world economic growth, the IMF says in a report to Group of Seven finance ministers meeting this week in Singapore.

In the report, which was seen by Expansion, the FT’s sister paper, the IMF argues that low prices at the petrol pump “encourages excessive consumption with adverse environmental implications”.

Well, they are right, of course. Hike the prices, and consumers buy less use their resources more efficiently. This is where the article starts getting interesting…

The measure [ed: the call for new taxes] was unpopular among oil ministers of the Organization of Petroleum Exporting Countries, which met in Vienna on Sunday. They are already seeing signs of changes in consumer behavior, such as the trading in of “gas guzzlers” for newer, more efficient vehicles.

US sports utility vehicle sales fell 14 per cent in August, while sales of compact cars were up 18 per cent.

The ministers are for the first time in two years beginning to voice concern that the demand slowdown could lead to a price slide which would hit the record profits they have enjoyed since 2003. Nevertheless, they are likely to postpone any reduction in their supply until the end of the hurricane season.

The full article is here…

Okay. That’s a different idea. Let’s go over the rationalizations we’ve been told so far…

  1. There wasn’t hurricane damage (note: the season is not yet over) to the oil rigs in the Gulf of Mexico… but why would prices have been inflated by a shortage that never was – caused by hurricane damage that had yet to happen anyway?
  2. The US Economy is slowing… I’m no economist, but everything I’ve read about the US Economy indicates that it’s chugging along as well as, and in many sectors, better than what’s expected and “normal”. It’s not slowing. It’s a freight train.
  3. The end of the summer driving season… Yep, it’s not summer any longer.
  4. A “cooling of tensions” between Iran and the US… Are they even reading the news? You’ve got to be kidding me on this one. This story and related tensions continues to heat up and is due to come to a head at the UN soon, despite a general lack of reporting this in the US.

Besides the “end of the summer driving season” – which is predictable each year – it’s apparent to me that most of these rationalizations for our high summer prices and rapidly falling current prices rings a bit hollow. Maybe the sudden clearance-pricing has more to do with what the oil ministers at OPEC says worries them:

They are already seeing signs of changes in consumer behavior, such as the trading in of “gas guzzlers” for newer, more efficient vehicles. … The ministers are for the first time in two years beginning to voice concern that the demand slowdown could lead to a price slide which would hit the record profits they have enjoyed since 2003.

Interesting.

Are the “oil ministers” seeking to encourage old habits with the carrot of cheap oil products now – hoping we slip back into “gas guzzling” mode, and are the “oil barons” at home seek to maximize profits to record levels once again buy encouraging us to quickly forget the lessons of $3.25 per gallon gasoline?

The inflated oil prices we endured this summer help encourage innovators, inventors, and investors to decide to “give it a shot” to develop new technologies which may reduce our dependence on the long established, and evenutally mortal, oil market. It became “worth it” to do expensive R&D work, with the promise of a potential pay-off at the end – when a viable and popular alternative is found.

If any of these new new ideas came to market, it would cut into the profits of the current market, of course. This past summer there has been a lot of exciting news related to fuel alternatives that are actually economically viable when oil prices are as high as they have been.

Reducing the oil prices, and the potential pay-off of any of these new technologies, in effect dampens the enthusiam in which oil’s replacement is being persued, and protects the established system.

The oil ministers tell us that they are now worried that high oil prices have exceeded the limit of consumer apathy, and consumers are changing their habits. Are they offering the carrot of cheap oil to us, seeking to “pull us back” into our old glutinous habits, encourage sales of gas-guzzling vehicles, discourage development of alternative technologies?
I think that consumers are paying attention. I hope we all enjoy these lower prices, but continue to encourage efficient consumption habits and innovating new technologies for our future fuel needs, because the carrot can be taken away as quickly as it can be given.

Comments

2 Responses to “Falling Gas Prices = The Big Carrot?”

  1. Doc Miles on September 13th, 2006 9:34 AM

    More news from OPEC meeting suggesting that they have noticed a change in behavior, this time called “economic nationalism”

    From The Washington Post
    Wednesday September 9th, 2006

    “When prices are high, passions can run high,” Tillerson said. “Economic nationalism may gain in popularity” at the expense of developing global markets and the world economy, he said.

    Read it in context…

    I’d like to offer that the phrase “at the expense of developing global markets and the world economy” is a euphemism for “at the expense of our record profit margins of the last three years”.

    By the way, the focus of the article where I culled this quote is Aramco’s (Saudi Arabia’s state owned oil company) claim that only 18% of the world oil reserve has been consumed so far, suggesting that we can continue to consume at current levels for 140 more years – which really isn’t great news, considering Exxon Mobile believes that demand for oil products will increase by 50% in the next 10 years. (More on this later…)

  2. Fuelishness! » Blog Archive » Won’t Return to Gas-Guzzling Habits on September 19th, 2006 9:52 PM

    […] A recent article from America’s cheese-capitol indicates that the sustained high gas prices of this spring and summer have changed the gas-guzzling habits of survey respondents, and that the recent drop in gasoline prices will not change them back. Let’s hope there are similar mid-west sensibilities from the right coast to the left coast. From Wisconsin State Journal Survey: Driving won’t climb as gas prices fall MARV BALOUSEK […]

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