The price of oil and the price of gasoline continue to climb.  Last Friday, oil prices hit $140 per barrel.  Last week, regular gasoline prices topped $4.00 on average for the first time.

In order to investigate the consumer aspect of these developments, Auto Futures Group and Technometrica partnered for a joint survey.  The results show that consumers have begun to accept high prices as a fact of life; over one third of consumers expect gasoline prices to top $5 this summer, and a similar number expect to see $6 within the next three years.  See our press release for more Info . . . .

The expectations of such consumers would amount to a faster rate of price increase than we have seen in the past.  Based on historical data, a purely mathematical estimate would indicate prices between $5.35 and $7.35 within the next five years, i.e. about $4.50 to $5.75 in the next three years.  The Energy Information Administration of the Department of Energy also projects continued strong prices for the next 12 months, but with a dampening tendency as more non-OPEC oil comes on late in 2009. 

Here the question is whether the additional non-OPEC oil production capacity will re-establish a free-market style supply-demand market situation with softening prices, or whether continued speculation and price collusion might lead instead to a so-called oligopoly-driven “utility price model” with continued high prices.  Wondering whether that is realistic?

Here I quote from OPEC itself:  “Historically, most non-OPEC producers have taken advantage of OPEC's voluntary production restraint by increasing their own production whenever possible. As a result, the market share of non-OPEC producers rose for a number of years, but oil prices remained at relatively low levels and the markets were less stable than they could have been.”

“However, the oil price slump of 1998 and early 1999 reinforced OPEC's constant message that oil market stability can only be achieved through co-operation between OPEC and non-OPEC oil producers. In support of OPEC's efforts to restore stability to the oil market by restraining output, several non-OPEC oil producers also cut their production, thus helping prices recover from the slump. These countries included Mexico, Norway, Oman, and Russia. “

And on Tuesday June 10th, Reuters reported:  “The International Energy Agency, adviser to 27 industrial economies, cut its expectations for supply growth from countries outside OPEC to 460,000 barrels per day above 2007 levels, down from 680,000 bpd a month ago.  The U.S Energy Information Administration, the statistical arm of the Energy Department, cut its forecast for non-OPEC output growth nearly in half to 310,000 bpd from 600,000 bpd.”

For the consumer, it matters little whether oil prices are increasing due to collusion, security risks, refinery problems, delays in oil-field development or speculation.  The effects on consumer confidence are more psychological than physical; on average americans still spend relatively little on gasoline compared to other expenses.  But those expenses will likely rise more substantially than gasoline expense for two reasons:

1. •Diesel prices have increased 68% over the last 12 months (from $2.83 to $4.70 average), whereas gasoline has only gone up 28% (from $3.12 to $4.04).  Because the US economy is quite dependent on long-distance trucking, high Diesel fuel prices are already having a very deleterious effect on the prices of food, goods and services across the US.  Higher diesel prices also cause a major drag on profits, with more to come. 
   

2. •Because natural gas prices and coal prices are increasing in addition to oil prices, utility bills are going up quickly - arguably for the average household the dollar increase in utility bills is likely greater than that of gasoline.
   

Re-establishing healthy gasoline prices, inflation and consumer confidence requires a concerted effort on the part of public policy makers, foreign relations, financial markets and the press.  The presidential candidates would do well to use the campaign as a platform to focus public attention on Energy Policy. 

The US government must re-orient Energy Policy away from unproductive subsidies and laissez-faire management approaches towards a consistent comprehensive policy of responsible energy management, foreign relations, industrial relations, public education and environmental regulations geared towards sustainable, profitable and stable energy planning. 

The rest of the world is not waiting for the US in this regard, they are already well along with their plans.  The dollar will not recover until the US demonstrates responsibility in energy policy (as well as defense, public debt and financial regulation).

-Bert Holland