Insights & Advice


Pump Prices Will Move Higher So Get Used To It

“When is the government going to do something about these gas prices?” a client from Texas asked me recently.

He had just filled up his Chevy pick-up and it cost him $70. Together, we complained and commiserated over this summer’s predictions of $4/gallon gas for a couple of minutes before it dawned on me. There is no white knight out there that’s going to fix this. We’re on our own.

In the spirit of True Confessions, I admit that for over three years now I’ve been waiting for someone to “fix my gas problem.” In the meantime, I continued blithely consuming gas and oil at an ever-increasing rate—until recently. When prices topped $2/gallon I grudgingly traded in my SUV for a Subaru feeling guilty that for the first time in my driving life I was no longer buying America. My wife did the same and we cut our fuel consumption considerably but it isn’t enough. My daily commute is 122 miles a day, from Hillsdale, New York to Williamstown, Ma. and back. My wife commutes to Troy which is a little shorter. Together we have seen our transportation costs double in about two years (about $850/month) despite down-sizing our autos. Now we are shopping for hybrids.

At the same time our home has 63 windows and three floors and costs a fortune to heat. We bought a wood-burning stove, hedge our fuel costs by paying in June when prices are lower and put in an automatic thermostat. We regulate our fuel consumption closely and only for a few hours per day. It isn’t enough.

Most of us know that living in our beautiful Berkshires demand a price. In exchange for our environment, jobs are scarce and we have to travel greater distances to hold one. At the same time our incomes and benefits are below what we could make in the cities. Finally, there is little if any public transportation available so we really feel the economic impact of higher energy prices to a greater extent than say people living in Albany, Pittsfield or Boston. We are not alone. Millions of Americans live in similar areas, many far more rural or isolated than our own.

Ever since the late Seventies, when OPEC doubled oil prices, the United States government, in co-operation with environmental groups, international groups, the energy companies, the utility companies, even OPEC itself has tried to convince us that Americans needed to conserve energy. Policy after policy, including raising federal and state taxes on fuel failed to move us.

In the past a majority (55%) of Americans polled have supported raising the federal gasoline tax if it would reduce our dependency on foreign oil, reduce global warming and gasoline consumption. Yet, politicians were loathe to do that because it would hurt those least able to afford it. Two years ago several economists argued that raising the fuel taxes by $1/gallon over five years while lowering income taxes to offset the higher costs was the best way to reduce consumption. It went nowhere.

Frustrated economists have long argued that the only way to get Americans to stop guzzling energy was to raise the price. Politicians and voters scoffed at that. With complete indifference, we continued to drive the largest cars that Detroit could make, bought larger and larger homes further and further from our places of business and at the same time demanded that something be done about the smog and traffic. So here we are two years later and market forces have done what economists have long advocated and it is working.

At these price levels Americans are finally feeling the squeeze. Nearly half of all Americans, me included, are cutting back on their summer vacation plans. Consumer spending is also dropping and internet sales are rising as that trip to the mall becomes more expensive. And rising fuel costs are affecting everything we consume. Diesel fuel, which is already averaging over $4/gallon nationwide, is used to transport the vast majority of our food, consumer and industrial goods. Is it any wonder that independent truckers nationwide instituted a go- slow strike recently to protest the $1,170 cost to fill up a 300-gallon tank in a typical long-haul tractor trailer. Yet, at these price levels we are only now reaching a tipping point

The latest reports indicate that a slim 51% of adults are saying the rising costs of gasoline is having a big impact on their personal lifestyle while the rest said it has had some, little or no impact yet. Naturally the higher one’s income the less impact while 71% of those making $20,000 or less say they are in a world of hurt right now. The sad truth is that prices will have to go appreciably higher before the rest of us start to cut back. The government knows it, I know it and now you know it.

This summer’s gasoline demand is forecast to drop by about 0.4 percent and overall consumption of petroleum products will drop by 85,000/bbls./day this year as a result of the economic slowdown and higher petroleum prices, according to the Energy Information Administration. That’s not much given that this country consumes a year.

One rule of thumb among economists states that a 10% increase in gasoline prices would reduce consumption by 6-8 5 over time.

Posted in Macroeconomics, The Retired Advisor