Insights & Advice


Running on Empty

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

He had just filled up his Chevy pick-up and it cost him over $70. Together, we complained and commiserated over the coming $4/gallon gas price. We both agreed that the McCain/Clinton proposals to cut gas taxes during this summer’s driving season were not going to cut it long term, nor was a temporary suspension of stock piling more oil to our strategic reserve. I tried to think of a solution. In the ensuing silence, it finally dawned on me that there is no white knight out there that’s going to fix this.

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 Ford 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 wasn’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, three floors and costs a fortune to heat. We bought a wood-burning stove, hedged our fuel costs by paying in June when prices are lower and put in an automatic thermostat. We regulate our fuel consumption closely and use it only a few hours per day during the winter but it isn’t enough. So we have decided to bite the bullet and look for a home closer to our jobs. With the savings on fuel we could actually almost afford to rent an apartment or a second mortgage. I doubt we would be doing any of this if the price of gas were lower.

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. As the price of gas climbs, I believe more Americans will be forced to make difficult choices like our own.

Ever since the late Seventies, when OPEC doubled oil prices, the United States government, in co-operation with environmental groups, international agencies, the energy companies, the utility companies, even OPEC itself have tried to convince Americans that they needed to conserve energy. For the most part, we ignored them.

The inescapable facts are that the world’s oil reserves are declining and will continue to do so and we don’t own them. Both the existing reserves of oil and new reservoirs are no longer in the hands of the United States. Big Oil is in long-term decline so it does no good to keep beating that dead horse. At the same time demand for oil by competing economies throughout the world, especially China will continue to drive up the price of this increasing scarce resource. Read my lips America: oil is going the way of the buffalo.

Policy after policy, including raising federal and state taxes on fuel failed to convince us of that. 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 are loath to increase the tax again 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. Now, we are talking about lowering taxes. All that will do is allow us to temporarily consume more of it.

At these price levels we 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 increasing 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 decline 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.

One rule of thumb among economists states that a 10% increase in gasoline prices would reduce consumption by 6-8 % over time, how much time they don’t know. If it took me three long years and a 53% increase in the gas price to get to the point of buying a hybrid and possibly moving, how long and how much higher will gas have to rise before the remaining 49% of Americans begin to wise up and start conserving? It’s your move, America.

Posted in Macroeconomics, The Retired Advisor