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International macroeconomist on Rita's effect

Lori, Baltimore: Do you think gas prices will spike and then rise after Rita passes through?

Dr. McIntyre: Gas prices have recently jumped based on where the futures market (a market where traders buy and sell oil contracts at a specified price in the future, hence the term) thinks oil prices will be over the next few months. The ultimate answer to your question depends on how much (if at all) Rita further disrupts oil production and refining in the Gulf of Mexico. The good news is that foreign suppliers such as Canada and the OPEC group have ramped up production since [Hurricane] Katrina hit.

Kim Asch, Georgia, Vt.: Give us your best prediction -- how high will prices go? And how high will they need to go before there is an authentic effort in this country to develop alternative fuels?

Dr. McIntyre: I'd say that the maximum oil price we could see over the next several months is in the neighborhood of $70 a barrel. This is a maximum, though; about $60 to $65 is what most experts are predicting.

Regarding your second question, some perspective might be helpful here: in inflation-adjusted terms, oil prices would need to get to about $90 to be where we were in the early 1980s, and would likely need to go significantly higher to see the same broad impact we saw during that period. Alternative fuel sources exist (solar, wind, fuelcells, etc.) but they are just not cost effective right now.

For these, or any new technology to be adopted on a large scale, a combination ofpersistently higher oil prices and cost improvements in alternatetechnologies needs to occur; if historical precedent is anything, this is adecades-long process. In the short term, and if gas prices remain where theyare, I would expect to see lower sport-utility vehicle sales, more smaller cars being brought to market and more cardigan sweaters being worn at home.

Rich Lownes, Philadelphia: How can we have so many years of reasonable increases in oil prices, yet in the last year, prices have about doubled? I know we have had Katrina and other influences, but some other forces must be at work to makeprices rise so fast. Thank you.

Dr. McIntyre: This is a good question. The big jump in oil prices seen over the past few years is primarily due to economic growth in the United States and China.

As we all know, China is a large and rapidly growing economy, and their oil needs areincreasing accordingly. Add to that a consistently strong United States, andworld oil demand has jumped dramatically of late. Factoring in real or perceived supply disruptions ranging from political instability in the Middle East to a bad Atlantic hurricane season just adds fuel to the fire (no pun intended).

Miss P, Baltimore: With the rising oil prices, how are persons who are low income or are on a fixed income and do not qualify for any type of assistance going toafford oil to heat their homes in the winter months?

Dr. McIntyre: These individuals will have to either reduce their consumption of heating oil or reduce expenses elsewhere; it's a bitter pill to swallow sometimes.Most utilities -- including Baltimore Gas and Electric Co. -- and fuel suppliers have pricing plans that allow consumers to more or less evenly distribute their fuel bills over the course of the year so as to somewhat guard against big jumps in heating bills in the winter months, which should help.

Mary Prise, Baltimore: I would like to know how foreign imports get priced in general. When traveling out of the United States, I have noticed some American products are priced higher than they are at home, but some products are not. Is imported oil priced in this same way, and how does the effect of the hurricane getfactored in?

Dr. McIntyre: For commodities such as oil that are traded in large, global markets, international differences in prices are due primarily to differences intaxes; that's why a gallon of gas costs two to three times more in Europe than itdoes in the United States.

Other explanations for cross-country price differences include transportation costs (which are reflected in import prices), trade restrictions of various sorts (Canadian lumber and British beef immediately come to mind here), and differences in demand in each country (the French, for example, have a much higher demand for Brie than Americans).

John Boyle, Baltimore: Why is it that gas prices never return to the level they were at before incidents happen in the economy? Every year, they seem to advance 50or 60 cents.

Dr. McIntyre: Actually, petroleum has been remarkably resistant to inflation over the past 20 years; there had been no inflationary trend in oil prices since themid-1980s until the past few years. Generally speaking, commodity prices are very volatile, and it is my impression (and I may be wrong) that the public seems to remember big jumps in gas prices a lot better than it does price decreases.

Regarding the specifics of your question, the supply disruptions that you are referring to tend to occur very quickly -- it only takes a hurricane a few days to damage a refinery or a terrorist a few minutes to threaten a pipeline -- but restoring capacity takes much longer, so it makes sense that prices would rise quickly and come down slowly.

John Conner, Shade Gap, Pa.: Can you think of any possible ethical justification for the rise in oil prices in the last several months?

Dr. McIntyre: Market conditions have dictated the rise in oil prices over the last several months. We have seen the so-called "summer driving season" increase demand and various disruptions negatively affecting supply.

Cathy, Baltimore: How is it possible for the oil producers to be allowed to increase the cost per gallon on what they think might happen? So, they increase theprice per barrel. What then if none of the oil refineries are damaged and everything is fine? They have made all the additional revenue. We are out of our money and the oil companies are even richer. Do they ever pass the money back to the consumer? No.

I am so disgusted with hearing that the major oil companies are having record profits for a particular quarter. Our elected bodies in Washington, D.C., better get on their sticks and put some regulation on the amount that can be charged on gas or the economy will go to pot.

Dr. McIntyre: Delivery contracts for oil refiners are negotiated months in advance, so the futures market is an important way these firms can hedge against sharp and unexpected changes in crude prices. What is going on in this oil market isnot so different than what happens in other industries, and many prices that we face on a day-to-day basis reflect future expectations. It is also important to remember that this process works both ways -- lower oil futures prices translate into lower gas prices.

Right now, oil companies are doing very well, which is good for them andtheir shareholders; this wasn't the case a few years ago. Given thedramatic increase in the incidence of stock ownership in the United States seen inthe past generation, it is harder to view the financial position of U.S.corporations in such a populist sense anymore. To be fair, though, thegains we're going to be seeing in our IRAs are probably not as much as we'repaying at the pump.

Finally, putting a cap on gas prices is most definitely a bad idea. Remember what happened in the early 1970s? As was the case then, any price cap that is set below the market price would result in shortages and rationing; in economics parlance, demand would exceed supply. Gas may be expensive right now, but one is still readily available. This is better than the alternative.

Rick Webb, Parkton: Now will Congress allow drilling in Alaska?

Dr. McIntyre: Maybe. The thing to consider is that oil prices are set in global markets, and the amount of oil that could be pumped out of the Arctic NationalWildlife Refuge (ANWR) would not make a big dent in world supply, and thusoil prices. And if drilling started today, it would take years before anywells would come on-line.

Strategically, it may make sense to develop ANWR, but it would have little impact on domestic oil prices in either the short or long term.

Copyright © 2015, The Baltimore Sun
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