Falling Gas Prices = The Big Carrot?
It seems like Christmas in September here in the US. Gas prices are free-falling to levels we havenâ€™t seen in a while. Itâ€™s such a sudden and drastic change that itâ€™s got me wondering â€œwhy?â€â€¦
From USA Today
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.
â€œThe reason prices are going down so far so fast is that they shouldnâ€™t have been that high in the first place. Two reasons they were: fear and speculation,â€ says Mike Oâ€™Connor, president of the Virginia Petroleum, Convenience and Grocery Association. It represents gasoline distributors who operate about 4,000 stations.
Oâ€™Connor says $2 gasoline â€œis more likely than unlikelyâ€ if the Gulf of Mexico isnâ€™t hit by hurricanes and if there isnâ€™t a flare-up of tensions in oil-producing regions.
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 greatâ€¦ Iâ€™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 worldâ€™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 FTâ€™s sister paper, the IMF argues that low prices at the petrol pump â€œencourages excessive consumption with adverse environmental implicationsâ€.
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 interestingâ€¦
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 â€œgas guzzlersâ€ 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.
Okay. That’s a different idea. Letâ€™s go over the rationalizations weâ€™ve been told so farâ€¦
- There wasnâ€™t hurricane damage (note: the season is not yet over) to the oil rigs in the Gulf of Mexicoâ€¦ but why would prices have been inflated by a shortage that never was – caused by hurricane damage that had yet to happen anyway?
- The US Economy is slowingâ€¦ Iâ€™m no economist, but everything Iâ€™ve read about the US Economy indicates that itâ€™s chugging along as well as, and in many sectors, better than whatâ€™s expected and â€œnormalâ€. Itâ€™s not slowing. Itâ€™s a freight train.
- The end of the summer driving seasonâ€¦ Yep, itâ€™s not summer any longer.
- A â€œcooling of tensionsâ€ between Iran and the USâ€¦ Are they even reading the news? Youâ€™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 â€œend of the summer driving seasonâ€ – which is predictable each year – itâ€™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 â€œgas guzzlersâ€ for newer, more efficient vehicles. â€¦ 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.
Are the â€œoil ministersâ€ seeking to encourage old habits with the carrot of cheap oil products now – hoping we slip back into â€œgas guzzlingâ€ mode, and are the â€œoil baronsâ€ 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 â€œgive it a shotâ€ to develop new technologies which may reduce our dependence on the long established, and evenutally mortal, oil market. It became â€œworth itâ€ 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 â€œpull us backâ€ 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.