Surging Gasoline Prices: A Longer Perspective Needed
April 13, 2004
As usually happens when there is a sharp run-up of energy prices, a wide array of facts, diagnoses, proposed remedies, and political rhetoric all compete for public attention. How much this verbiage actually improves public understanding of the underlying issues is problematic.
Take the case of spiking gasoline prices—at the very least an irritant and to many people a genuine hardship. But it isn’t widely recognized that even a price of $1.80 a gallon falls below the peak of $2 recorded in the early 1980s (expressed in constant 2003 prices).
And it is certainly arguable that low fuel prices dating from the mid-1980s stimulated demand for low-efficiency vehicles. If the number of gas guzzling cars and trucks had not surged over the past decade, today’s gasoline demand, and therefore prices, might be much more muted.
Assigning blame for the crude oil price rise (which helps drive gasoline prices upward) also tends to be simplistic. To be sure, the world oil market is scarcely a model of lively competition. At the same time, OPEC’s monopolistic striving often falters through conflicting political and economic objectives, cheating on output quotas, weak enforcement mechanisms, and the oil production of non-OPEC nations. While the cartel’s recent decision to reduce production by a million barrels a day may aggravate conditions for oil consumers over the next few weeks and months, to date, it is rising oil demand (in part, most likely, accentuated by inventory build-up) rather than supply curtailment that appears to have been decisive in price escalation.
Amid rapidly churning events, the availability of quick remedies is limited. No doubt, a turnabout from purchases to augment the Strategic Petroleum Reserve (SPR) to limited sales would, at the margin, have some stabilizing impact on the world oil market. But short of an acute emergency—which is demonstrably not now the case—it is inconceivable that SPR withdrawals would exceed, say, a three-month total of around 50 million barrels or between 500,000 and 600,000 barrels a day. In the context of a "fungible" and integrated world oil market reflecting production of around 80 million barrels a day, the limited cushioning effect of SPR releases on crude oil prices becomes self evident. That is not to dispute the usefulness of even minor recourse to the SPR. Of course, such deployment of the SPR would compel policymakers to face up to the fundamental purpose of the reserve. The fact is that all too often in its history, SPR transactions have been dictated by government fiscal objectives rather than oil price stabilization and the avoidance of macroeconomic damage to the country.
The current energy perturbation evokes ideas—many of them clearly spurred by election-year politics on both sides of the political divide—that conflate today’s situation with long-term energy strategies. Renewable energy targets, opening of the Arctic National Wildlife Refuge for exploration and development, higher energy taxes, automotive fuel economy standards, and other policies all deserve serious discussion; but each involves initiatives directed to long-term change rather than any short-term correctives.
As a result of some of these long-term measures, the U.S. economy will continue to become less oil-intensive and less energy-intensive—a trend that is already clearly observable. (Oil use per unit of GDP has fallen by around half over 30 years.) For the present, the thought that "this too shall pass" is not merely a cheap nostrum. The fact is, the country has experienced numerous instances of oil- and gasoline-price volatility in recent decades. Although there’s no denying the economy might have benefited had it been spared such shocks, it is hard to make the case that the damage inflicted was more than passing.
Quite likely, that will turn out to be the case this time as well. But in a world where the interplay of political tensions and energy may be an enduring fact of life, no one in their right mind would shrug off the possibility of a more worrisome scenario: an extended period of high oil prices, with damaging economic consequences. All the more reason to concentrate on longer-term objectives that are within reach and abandon the search for overnight fixes that will only prove fruitless.