Comments on Somewhere in the Sun: Gas Prices -- What is Going to Happen?

Here's a good articleAnd I know that higher gas pr...

2008-06-10T16:20:52.328-04:00

Here's a good article

And I know that higher gas prices will spur people into action to make changes to their lives to reduce consumption. I know that this is the ultimate goal. I am not arguing for lower gas prices, per se. I don't support John McCain's gas tax holiday.

In fact, I do like the changes that I'm seeing, both for the environment and the nation. BUT... I worry that gas prices will continue to rise, and with our other spending, and other economic crisis's we're facing... Can we handle it? Is it too much? Are prices going to rise too fast?

Especially if there is no "bubble" and speculation continues to drive costs higher in spite of actual demand...

But, we shall see. My one little person isn't going to solve it.

(2) Changes in oil demand: There certainly is incr...

2008-06-10T15:18:00.000-04:00

(2) Changes in oil demand: There certainly is increasing demand; however, I would argue that (i) demand growth was fairly predictable 5-10 years ago when oil prices were very loew and (ii) nothing has changed about demand over the last 6-12 months to explain the rise in oil prices. The market doesn't process information instantaneously, but the lag between the growth (or the predictable growth) in use and price increases seems to be too much to explain the recent acceleration in oil prices just to demand. (We should also keep in mind that a significant portion of the price increase is due to the weakening dollar - see point (1) below.)

(3) Risk and speculation: You would expect that risk would be built into the price of oil. So there is likely some risk premium for oil deliveries in the late summer and early fall to account for hurricane risk, as well as premium for the risk of supply disruptions in oil-producing countries and demand increases. My feeling is that if there is speculation going on, then some of it is probably using higher estimates for risk premiums. The other type of speculation is that oil is making money and investors are chasing it for a relatively quick profit. That second type of behavior could lead to an "oil bubble" (although I would expect it to be a small bubble, if it exists).

(1) Overall economy: Not good at the moment. The dollar is weak, which is hurting us in the price of foreign goods (especially oil). The real estate market, energy prices, and food prices (although food prices are pretty heavily linked to energy prices in this case) are putting a lot of people into bad spots and further weakening consumer confidence.

I would argue that at the national level the real estate downturn is not as big of a problem as it seems, although every few weeks we see something new - major collapses in prices in some areas, problems for real estate lenders and construction companies, disasters on Wall Street from overextending into sub-prime investments. Energy is a real problem, though, and it's going to be some time until we work our way out of this.

That said, two things could happen to improve things. First, oil prices could fall fairly sharply in the fall if there aren't any major supply disruptions (some analysts think oil could fall as low as $80 - $90 per barrel, which is still pretty high to where we were 8-10 years ago). Second, well, maybe things just aren't quite bad as expected. That would both result in stronger growth and increased confidence, which would be doubly beneficial.

We've seen far worse days and the U.S. economy is nothing if not resilient. Not a guarantee, but not a reason for gloom and doom, either.

If it were just oil, I wouldn't be so worried, but...

2008-06-10T11:09:59.014-04:00

If it were just oil, I wouldn't be so worried, but we're also looking at the mortgage mess and an expensive war. All of this equals one big mess.

Demand has dropped slightly in the US, but I have yet to see how that is affecting overall demand, which is what is really important. If we're dropping our consumption, it helps, but not as much if China/India are steadily increasing their consumption at a faster rate.

And you're right -- prices right now are not being driven by demand, but on speculation. I tend to not always understand speculation so I don't know what affect it would have if, say, a big hurricane came up through the Gulf of Mexico.

Personally, I think that the price of gasoline and...

2008-06-10T09:56:00.000-04:00

Personally, I think that the price of gasoline and oil are going to climb a little higher over the next year and then slowdown. I don't know whether there is really an "oil bubble" or not, but I tend to think that speculation and hedging is certainly driving some of the rapid price acceleration. (From a basic economic perspective, it's not as if oil consumption has been growing incredibly over the last 6-12 months, which suggests either a supply problem or something else in the market driving prices. Anyway, I think we already are seeing changes in consuming patterns here, which aren't helping the economy probably, but are showing that oil demand is somewhat elastic (demand responds to price) and that price will slowdown a bit. I think we could see an "oil recession" but an "oil depression" is unlikely.

As to who's fault it is: the market, OPEC, government policy, consumers, emerging economies in China and India, foreign policy and turmoil in: Iraq, Iran, Nigeria, Russia, Venezuela, etc., the neglect of public transportation and community planning ... Essentially, we (collectively and individually) made many decisions assuming oil/gas would always be relatively cheap - bigger cars, living further away from work, bigger homes, neglecting renewable energy development, neglecting public transportation development, suburban sprawl - and now it's a problem when the price of oil/gas has grown so quickly.