I was reading yet another article in the paper about the high gas prices this morning. It quoted Severin Borenstein, director of the UC Energy Institute:
So why was gas so cheap back then? I remember my parents buying gas in the mid-80s for 79c/gallon. I remember buying gas for $1/gallon in the late 90s. What’s different now that makes the gas prices so much higher, and why is this guy so certain that we won’t have cheap gas like we did in the 90s again?
There wasn’t as much demand for energy in the '80’s and '90’s.
China, 1980: 1 billion people using 17.5 million BTU’s each.
China, 2002: 1.3 billion people using 33.3 million BTU’s each.
India, 1980: 700 million people using 6.2 million BTU’s each.
India, 2002: 1.05 billion people using 13.3 million BTU’s each.
This trend is unlikely to reverse (indeed, we don’t want it to reverse, since regression into worse poverty in China and India wouldn’t be in our interest.) And although one can’t be certain, there is unlikely to be any large shift in the energy supply curve to compensate.
Well, we wouldn’t mind the demand reversing if the cause of the reverse was increased energy efficiency.
It’s always supply and demand, and the fears of future disruptions and/or gains to the supply plus expectations of future increases or lack thereof in the demand.
After OPEC enforced a rise in oil prices in the 1970s, oil prices hit what is still the all-time adjusted high in, I believe, 1980. This caused for the first time improved conservation measures in the U.S., including a mandated increase in CAFE, the average gas mileage in U.S. car production. The U.S. was still driving the worldwide demand for oil in those days, so any measures we took had a disproportionate effect on demand. Companies also tried to increase supplies by new drilling and new resources.
With lowered demand and increased supply, oil prices eventually dropped.
The reverse conditions hold today. U.S. demand has steadily risen. The growth of low gas mileage SUVs - which don’t count in CAFE ratings because they are treated as trucks - along with the growth of light trucks themselves mean that the vehicle fleet requires far more gas than future expectations once thought, especially since small and efficient cars sell even more poorly than anticipated.
Refining capacity has not increased because the low oil prices of the era you’re referring to meant that oil companies then did not have the huge profits of today to sink into expansion.
And China, along with India, have changed the worldwide demand equation. Japan was once supposed to do this, but the implosion of the Japanese economy - which took down much of the rest of Southeast Asia with it - meant that the demand increase never materialized. This fooled the shortsighted and the extremely large and quick Chinese ramp-up caught them by surprise.
Today oil demand is running as very nearly oil supply, as least for reasonable expectations of what can be pumped and refined. That means that oil futures - which are the price per barrel numbers that are featured on the evening news - are driven by fears of any possible disruption. Many of the major sources of oil - Iran, Iraq, Nigeria, Venezuela - are iffy in near future terms. Almost anything could disrupt supply from them. Katrina put a hurt on domestic refinery and pipeline infrastructure that we are still recovering from and forecasts indicate an even heavier hurricane season this year. SUV sales are down sharply in the first quarter, true, but the vehicle fleet is still biased heavily toward gas guzzlers and will require years to change in any appreciable fashion. Commuting times continue to increase nationwide, causing more gas consumption and stop and go traffic, the worst kind. Expects can probably name a hundred more problems with supply and demand.
What can or should be done about this is a topic for GD, not GQ, and I’m sure there are a dozen threads already there. But supply and demand really is the answer to your question. And lack of foresight, lack of political will to make unpopular decisions, and unwillingness to make sacrifices (albeit for an uncertain future payback) on the part of the public explains why supply and demand have not changed sufficiently to alleviate the current situation.
This reminds me of a recent radio interview (sorry, no cite) of a man who had researched the price of gas over the past fifty years. His claim is that the price of gas is cheaper now than it was in 1960. This is mainly because of infaltion and because cars are much more efficient now than they were then. Go figure.
I have a picture somewhere of a gas station near Spartanburg, SC, where the price was $0.67 sometime in 1998. This area of the south, for the most part, has had the lowest prices I have seen in my frequent trips from Augusta, GA to Gatlinburg, TN. I was born in late 1976, and this was the cheapest I had ever personally seen. I was driving a Ford Festiva at the time, and was averaging 46 MPG as it was, so it made for a cheap trip. I could drive there and back to see my parents for only $16-20 or so, round trip. That same trip in the Honda Ridgeline we now drive would probably cost somewhere closer to $100 or more, but we have not attempted that trip since gas has become so costly.
In Southern California during the late 60’s gas stations could often be found on all four corners of a particular intersection. These stations would sometimes have “gas wars” and prices would drop to 25 cents a gallon.
Then Nixon declared that the US Dollar could not be exchanged for gold any longer. After that, the Arabs didn’t know what all these Dollars that they were getting in exchange for their oil were really worth. They decided that they wanted a whole lot more Dollars now that they weren’t back by gold. The price of oil didn’t go up; the value of the Dollar went down.
I’d add to this that alaska came on line, and deep offshore drilling (Gulf of Mexico, Bay of Campeche, etc.) came on line. There were also major discoveries in older areas, like Venezuela, Indonesia, etc. All of this new crude flooded the market and kept prices down. The problem I see now is:
-China and India are now major automobile producers(and users)
-a lot of producers are now at capacity
-most ominously, Saudi Arabia hasn’t made a major oilfield discovery in 20 years-and the giant gharwar field is showing signs of declining output.
Add to this: FORD and GM sold millions of low MPG SUVs, and we have a problem. We need decisive action-like a major synthetic fuel program!
What you need is a substantial hike in gas taxes to bring them up to European levels and encourage consumers to become less profligate and also switch to more fuel-efficient vehicles. This would be very unpopular and there’s not a ghost of a chance that it will happen, of course.
Around the late 80’s, before I was paying any kind of attention to the news, my dad was grumbling about Britain attempting to break OPEC’s monopoly all by itself. As I understood it, they were producing oil at a loss in order to compete, thereby driving prices down.
I have no clue what basis this has in reality. (I’m not even aware if Britain owns oil wells.) Does anyone know what the actual deal was?
I saved a receipt from December 1998 when the 87 octane was 81 cents a gallon. The 93 was 89 cents.
I remember around Thanksgiving of 1997…79 cents a gallon. I remember thinking I should take photo…but did not have digital camera then.
I tell friends about the price of gas then. They don’t believe me…we don’t remember the good, only the bad.
I think you’re confusing encouragement with coercion, buddy. Encouragement would be giving a subsidy or tax break to people who buy efficient cars, or are “less profligate”, whatever the heck that means.
I remember shortly after 9/11 we got a bunch of Russian oil and the price of gas briefly dropped down to the $0.80-$0.90 range (this was in NC, a traditionally cheap-gas state.) Hard to believe that that was less than 5 short years ago and now I get all giddy like a little schoolgirl when I see it below $2.75.
Call me a conspiracy theorist, but I have a feeling that we will mysteriously see a sharp drop in gas prices not long after electing a chief executive who doesn’t have a big-oil background.
I remember shortly after 9/11 we got a bunch of Russian oil and the price of gas briefly dropped down to the $0.80-$0.90 range (this was in NC, a traditionally cheap-gas state.) Hard to believe that that was less than 5 short years ago and now I get all giddy like a little schoolgirl when I see it below $2.75.
Call me a conspiracy theorist, but I have a feeling that we will mysteriously see a sharp drop in gas prices not long after electing a chief executive who doesn’t have a big-oil background.
Heard a radio broadcast the other day saying that adjusted for inflation, the highest price of a gallon of gas in 1981 would cost $3.14 in today’s money.
I remember my stepfather bitching when gas went above 50 cents per gallon back around '73 or '74. He also threatened to quit smoking during those years because cigarettes were over $3.00/carton.
Sir Rhosis