Macroeconomist on high gas costs
McDaniel College's Dr. Kevin McIntyre addresses oil reserves, pricing
Michele, Columbia: I read that we may have already used up half of the oil that exists in the world. What happens now?
I would point out that the world is not going to suddenly run out of oil at some future date; as global oil supplies dwindle and extraction costs and, thus, prices rise, existing substitute energy technologies will become more attractive and new technologies might be developed. For example, we might see a higher incidence of nuclear power (as in France), further development and increasing cost effectiveness of relatively expensive existing alternatives such as fuel cells, solar, and wind, and the discovery of new technologies like cold fusion.
And history suggests that the market will indeed find a way. For example, 17th-century England's primary fuel source was wood. Toward the end of century, the British Isles were considerably deforested, and the resulting pricing pressures on charcoal led to the development of the coking process and the transition to coal as a primary fuel source. (As an aside, if you ever visit the Scottish Highlands, you will see forests planted in neat rows, the result of subsequent replanting.)
A similar market process can be used to explain the transition from whale oil to kerosene as the primary lighting fuel in Europe and the Americas in the 19th century.
Tony J., Sykesville: I've never been able to find someone that could answer this. Not that it will matter with the cost what it is today, but where does the nine-tenths of a cent come from in posted costs? Thanks.
Dr. McIntyre: Nine-tenths of a cent pricing is a marketing scheme designed to make gas prices appear slightly lower. Seeing a price of, say, $2.799 per gallon must for some be more pleasant psychologically than seeing a price of $2.80. Personally, I think it's pretty silly.
John P., Catonsville: If gas prices are adjusted for inflation, are we paying more for gas than in the 1970s, 1980s or 1990s?
Dr. McIntyre: If current gas prices are sustained, yes. According to the Energy Information Administration and using the Consumer Price Index (CPI) to adjust for inflation, the average price of gas was $1.95 in the 1970s, $2.13 in the 1980s, and $1.46 in the 1990s. Sustained gas prices in the neighborhood of $3 a gallon would be an all-time high in both nominal and inflation-adjusted terms.
Here is an interesting bit of trivia for history buffs: When adjusted for inflation, average gas prices were higher in the early 20th century than they were during the 1970s and 1980s, periods that most of us associate with expensive gas. Gas prices in the roaring 1920s, for example, averaged more than $2.50 in current dollars and averaged more than $2 a gallon even during the deflationary years of the Great Depression. Indeed, it was not until the 1960s that gas prices were consistently observed below $2 a gallon in current terms.
Daniel, Millersville: How does a rise in [the cost of] a barrel of oil immediately transfer to a rise in the price of already-refined gas at the pump, given that the gas bought today was refined months [or] even a year earlier?
Dr. McIntyre: This is because all current prices to a certain degree reflect expectations of future prices. Here's an example: Suppose I anticipate an increase in gas prices, say, next week. In response, I (and a few million other people) attempt to save a few dollars by filling up our tanks right now. This increased demand, however, ends up putting upward pressure on gas prices before any tangible reason for higher prices manifests itself.
In this regard, the expectation of higher gas prices can sometimes be a self-fulfilling prophecy. Things like this tend to happen all the time in a lot of different markets; last year's Labor Day weekend gas frenzy is a great recent example.
Nina, Lanham: What is causing the sudden spike in gas prices?
Dr. McIntyre: It's the usual culprits: global demand for oil -- driven by the large and robust U.S. and Chinese economies -- outstripping production; a weakening dollar, making foreign imports -- including oil -- more expensive; the approach of the "summer driving season"; and geopolitical uncertainty in the Middle East, Venezuela and Nigeria, raising concerns about future oil production. I would also suspect that the beginning of another hurricane season is producing some oil-related jitters.
Donna, Monkton: I can understand if stations need to raise gas prices, but do they need to be done on a daily basis? You can see one price in the morning and another in the evening and yet another the next morning! I'm sure they are not buying gas daily and paying higher prices.
Dr. McIntyre: Retail gas markets tend to be very competitive. Margins for individual gas stations are quite slim, so any opportunity to raise prices will be acted upon immediately.
Similarly, the failure to quickly adjust prices downward will likely result in lost sales. This, coupled with the fact that gas prices reflect crude oil prices -- which are changing more or less continuously 24 hours a day -- means that regular and frequent changes in gas prices are normal and to be expected.