Crude prices are approaching the true all-time high of close to $40 seen in the early 1980s, which translates to around $90 in today's dollars. Regular unleaded gasoline prices currently average above $2.91 per gallon at the pump, not far from the record of nearly $3.07 from September 2005. They would need to be above $3.12 in today's dollars to match the more than $1.41 price from 1981, according to U.S. government data.
The big difference between today and 1981 is that back then many oil producing nations excess production capacity and were capable of increasing supplies. Prices could drop dramatically from 1981 levels and do so fairly quickly. But today oil substitutes will take years to bring on line and China's demand for oil continues to grow. But on the supply side it is beginning to look like peak oil.
For many of the 39 million households making less than $30,000 a year, the difference between $2 gas and $3 gas is the difference between spending 10% of income on gas and 15%. In a word: Ouch!
The best bet for poor folks is to move to places closer to jobs and choose jobs closer to home.
Driving 65 instead of 75 mph reduces fuel costs 13 percent. Driving 55 mph would save 25 percent.
A dirty air filter and under-inflated tires can increase your fuel cost as much as 13 percent
The cost of crude oil represents 55 percent of what consumers pay at the pump, according to the U.S. Energy Information Administration. Another 22 percent comes from the cost of refining, 19 percent from taxes (on average, about 44 cents per gallon goes to state, federal and local taxes) and 4 percent from marketing and distribution, according to the administration.
Parenthetically, oil is a rising fraction of gasoline costs. In 2003 oil was only 44% of the cost of a gallon of gasoline.
With fuel costs at the time of this writiing at approximately $3 per gallon and $75 per barrel that suggests each increase of $25 per barrel translates into $0.55 per gallon of gasoline. So $100 per barrel would probably bring about $3.55 per gallon, $150 per barrel would probably bring us $4.65 per gallon, and $200 per barrel would hit us with $5.20 per gallon. This means that the more gloomy projections of "Peak Oil" pessimists would still only send American gasoline prices up to levels that Europeans have been paying for years. A shift toward diesels, smaller vehicles, and hybrids could make such fuel prices affordable.
My calculations above may underestimate the effects of oil price rises on gasoline prices. As oil costs go up the cost of energy used in refining and distribution rise as well. So some of the other costs of gasoline will rise as well when oil prices rise.
Bicycles, mopeds, and motorcycles would gradually become more popular at each step up in oil prices. People would choose jobs and home locations to reduce commuting and choose cars for higher gasoline efficiency. We could adjust to high fuel costs without severe drops in living standards.
Substitutes such as oil shale, coal-to-liquid (CTL) via variations on the Fischer-Tropsch process, and batteries in vehicles effectively put upper limits on the price of oil and gasoline. The biggest question I want answered: What are the real costs for oil shale extraction, CTL, and other oil substitutes?
What about the macroeconomic picture? US Federal Reserve chairman Ben Bernanke can not figure out whether the bigger threat from high oil prices is inflation or a cooling of the economy. Money spent on energy that therefore is no longer available to buy other goods and services.
Higher fuel costs potentially could push the rate of overall inflation higher, but Bernanke also noted an opposing risk: that the burden of new costs at the gas pump will take money out of consumer wallets and slow economic growth.
"Our current assessment is that the risks to inflation are perhaps the most significant at the moment," Bernanke said.
For more than a year, the US economy has absorbed the impact of rising oil prices. Consumer spending has not slowed. And the "core" rate of inflation, with food and energy stripped out, has been contained at an annual rate of about 2 percent.
Still, the core price level for consumers rose 0.3 percent in March, the most recent monthly inflation report. That was higher than expected.
The energy price increase is like a big tax hike on earnings. At some point energy price hikes have got to trigger a recession.
Shaking off the effects of Hurricane Katrina, the economy grew at an annual inflation-adjusted rate of 4.8% in the first quarter, the Commerce Department said. The burst offset a meager 1.7% growth rate in the last three months of last year after the hurricane struck the Gulf Coast.
Only once in George W. Bush's presidency — when the economy grew at a 7.2% rate in the third quarter of 2003 — has economic growth been more robust than in the first quarter.
In a separate report, the Labor Department said total compensation costs — salaries and benefits for all civilian workers — rose 0.6% in the first quarter. That was the slowest pace in seven years. Adjusted for inflation, employment costs fell 0.8% for the first quarter and 0.5% for the year ended in March.
Averaged out over the last two quarters, the economy grew somewhat less than the 3.5 percent rate clocked in 2005 and substantially less than the 4.2 percent pace of expansion in 2004.
And despite their spending spree in the first three months of 2006, American consumers are showing some signs of fatigue, as the University of Michigan reported yesterday that its index of consumer expectations declined in April. Wage gains, according to the government report, actually slowed during the first quarter rather than improving with the rising economy.
"A majority of households now expect an economic downturn and bad financial times by the end of this year," said Richard Curtin, the director of the University of Michigan's Surveys of Consumers.
The housing market shows signs of cooling. Demand for housing is shifting toward lower priced homes.
Sales of new homes nationwide shot up in March at the fastest pace in 13 years, reflecting a rebound from bad weather in February, but prices were lower, the Commerce Department reported Thursday.
Sales of new single-family homes rose 13.8 percent last month to a seasonally adjusted annual sales rate of 1.213 million units. The increase represented a recovery from a 10.9 percent plunge in sales in February.
But the median price of homes sold in March dropped to $224,200, down 2.2 percent from what homes were selling for in March 2005. It was the first time home prices dropped over a 12-month period since December 2003.
Higher oil prices will drive down the value of homes that are further away from work locations. The cheapest commute is a walk from the bedroom to a home office. The second cheapest is a walk across the street to an office or factory.
|Share |||By Randall Parker at 2006 April 29 03:31 PM Economics Energy|