The Increase of Gas Prices in the United States

            Scientists and specialists in energy industry believe that energy tops the list of problems facing humanity today because it impacts all other major problems, including water, food, environment, poverty war, disease, education, democracy, and population. Energy impacts everything that occurs in modern society. Most energy analysts today agree that energy at the aggregate level is primarily driven by economic activity, income, and prices – both energy prices and prices of substitutes (Haugland et al, 23). The US was built on the shoulders of reliable and affordable energy. For the past 50 years, oil has been the primary source of energy in the country, and the price of oil is closely tied to economic growth.

The four US recessions in the past 35 years were each related in time to an oil price spike. Although for well over a century, the global transition away from solid fuels (wood and coal) to liquid fuels (oil and natural gas liquids) to gas fuels (natural gas and hydrogen) and other energy sources has been quite predictable and will most likely continue, contemporary increases in gas prices will continue to threaten various areas of America’s life. Quite logically, this particular trend is expected to intensify with time accompanied with supply drop and further increase in demand. From the critical viewpoint, it is one of numerous reasons for why the US energy policy should be no longer focus on and prioritize fossil fuels as almost exclusive energy resources and technologies associated with their utilization. It is evident that in new century and thus in a new era of technological and scientific development, the US government should adopt a transition away from solid and liquid fossil fuels toward alternative energy sources.

            Worldwide economic specialists are worried that high energy prices would lead to global economic standstill and these fears prompted OPEC as well as exported outside this organization to act to achieve reasonable oil prices. Experts indicate that the price of oil in the global context was not being driven by market fundamentals but rather by a combination of factors outside its control. Among these factors is higher-than-expected oil demand growth, especially in the US and China. Furthermore, Russia, which has ramped up production considerably and is now the world’s second largest oil exporter, has raised oil production sharply in recent years, and also this country is running into export constraints due to pipeline bottlenecks, it too contributed significantly to overall trend. In addition, prices are believed to be propped up by a large number of speculators and fund managers in the futures market, by a security premium amid attacks aimed at disrupting supplies, by geopolitical concerns including instability in Iraq, and by tightness in the US gasoline market buoyed by stringent new product specifications.

            After OPEC tripled oil prices in 1973, consumers worldwide reduced their oil consumption (Shojai, 112). While the increase in the Gross Domestic Product in the United States since then has been close to 40 percent, the energy usage has risen only a small fraction. Much of the decrease of the use of energy has been due to conservation. A smaller part has been due to the United States economy becoming more of a service economy, rather than a manufacturing one.

            While conservation was initially driven by purely economic considerations the United States Congress has intervened politically by passing legislation that provides efficiency standards for automobiles and appliances. States, California being the first, have set energy standards for new building construction that are part of the building codes. Legislative action seemed to be called for because in recent years energy use in general and the use of oil in particular has started to increase again. Thus the federal and state governments have now legislated energy conservation as a public policy. This recognition of the importance of conservation has been a partial step toward redressing a past misallocation of resources on the part of the entire society and the government (Shojai, 109). Traditionally, ten times as much money has been spent on research for increasing the energy supply than has been spent on conservation research. Yet a barrel of oil saved is equivalent to a barrel of oil taken from the ground, and is frequently less costly to come by.

            The object of conservation is to have the world’s principal stores of energy (oil, coal, and natural gas) last as long as possible. After being forced for economic reasons to reevaluate how energy was being used, the users finally came to realize how profligate their use had been. The lessons, learned as a result of the need to save money, continue to be applied to conserving energy. Roughly 35 percent of the energy used in the United States is consumed in residential and commercial buildings (Ortiz & Sollinger, 46). The same percentage is used in manufacturing while 30 percent is used in transportation. In each of these categories the users have found – and continue to find – ways to save energy.

            One of Congress’ initiatives in energy conservation has been to mandate an average number of miles per gallon for the entire output of every automobile manufacturer. The car manufacturers have succeeded in satisfying the congressional mandate principally by redesigning the engines of their product and using lighter materials in their parts manufacture. There seems to be no question that the energy policy of the United States is to emphasize conservation. The Clear Air Act implements this strategy, aims to make turbines more efficient, and generally urges the citizenry not to waste energy.

            In 1975, Congress passed Corporate Average Fuel Economy (CAFE) Act passed. This act set standards that required an ultimate average fleet energy efficiency for each automobile manufacturer of 27.5 miles per gallon (Shojai, 110). In 1973 the average was 13.5 miles per gallon. At present it is 22 miles per gallon. Since there are about 200 million cars and trucks in the United States, this act has obviously saved a great deal of gasoline used since it was passed. Despite this attempt at conservation, however, the total amount of automotive fuel has risen since CAFE was passed because of the increased number of trucks of cars and trucks on the road. Gasoline use has increased by about 20 percent.

            However, it is evident that ambitious objectives of the US energy policy cannot be achieved by depending solely on conservation. In an article in the November/ December issue of “The Sciences”, Herbert Inhaber and Harry Saunders pointed out that except in the short term, conservation efforts often backfire because they lead to increased consumption (41). This is because increased efficiency is usually accompanied by decreased costs. The authors adduce several examples to support their thesis. Thus James Watt introduced an engine early in the 19th century which was twice as efficient as the Savery engine then in use. This is the sort of step we normally take as a conservation measure. However because the Watt engine made the Industrial Revolution possible, the consumption of coal increased ten-fold in the period between 1830 and 1863. In 1977 Denmark introduced draconian energy conservation measures (Haugland et al, 10). By 1986 Denmark’s use of electricity rose by 20 percent despite the tough laws aimed at saving electricity, as a result of the increased use of television and other appliances.

            In any existing sources, conservation policy has been regarded as one having beneficial effect for society. The increase in the use of fuels came about because the standard of living, the quality of life of the polity improved when an energy source became less expensive. The Industrial Revolution improved the lot of the people; progress added television and a host of other appliances for their everyday use; and more cars were used by the Americans with the expectation that the quality of their lives would be improved by these purchases. Improving the standard of living by insisting on conservation is a social benefit of conserving. It does not address what should be the primary reason for conservation, namely to extend the lifetime of nonrenewable fuel sources so necessary for our civilization. To achieve the object of conservation, it is necessary in addition to provide disincentives for using fuel, for example, by increasing its cost by taxation, something the US Congress seems loath to do. Its constituency opts for saving money rather than saving fuel.

            The US energy policy should aim to replace fossil fuel uses with renewable sources as quickly as possible for the reasons that have been repeatedly given. Real conservation – increasing efficiencies at the same time discouraging usage – has a role to play in such an energy policy. It is important to take advantage of inexpensive sources of energy while they are still readily available. This would give us time to develop the best possible alternative sources. But contemporary US energy policy defeats the purpose of conservation if it does not use the opportunity to invest and plan well for the future. From the critical standpoint, decision-makers do not seem to have the political will to make the financial investment necessary to use this window of opportunity wisely.

            Scientists at the Electric Power Research Institute have indicated there is some good reason for encouraging conservation. According to them, the future energy demands for the world will exceed the supplies that could reasonably be expected to be available in this century (Ortiz & Sollinger, 53). Husbanding the supply is therefore good public policy. In view of these predictions it is surprising the Electric Power Research Institute has not used its substantial political clout to lobby for the development of alternative renewable energy sources.

            There are two other reasons US present conservation policy militates against what might be a superior approach. First, by improving the efficiency of equipment designed for fossil fuel, this makes it difficult for alternative sources of energy to compete on a cost basis, and this discourages the use of alternative energy sources. Second, the more spent on our current policy of conservation the less there is made available for encouraging alternative source development.

The United States is the world largest gasoline consumer. Country’s daily demand exceeds 20.5 million barrels. Currently, the US yields 9 million barrels of crude oil in the world supply, and here this negative balance is evident. Indeed, the US gasoline equilibrium is primarily dependant on imports of crude oil and production facilities of domestic refineries. This pivotal interdependence has been particularly evident when on September 5, 2005 Hurricane Katrina ruined the Gulf Coast Refinery Center, the gasoline prices spiked the record-breaking $3.07. In some areas, the US citizens saw costs of $3.50 or more a gallon.

However, after the US increased its imports of crude oil and production efficiency, consumers evidenced decline in 34 cents a gallon. As one can see on the graph provided by EIA, the curve of price for crude oil has been declining consistently from $66/barrel in the beginning of September to $60 in mid October (EIA, Graph for Oil Prices, 2005). Simultaneously, the US situation with increasing gas prices is accompanied with global raise of gas price. According to the Washington Post reports, prices in Paris were at $6.77 a gallon in Paris in early September 2005 (Kaplan-Leiserson, 10). Traditional reasons for this are as follows: tight global refining capacity, and increasing energy demanding coming from China and India.

At the same time, it should be emphasized that the United States could not substantially affect world oil prices without retaliation. The ability of the United States to unilaterally affect world oil prices is limited, since US oil demand is only about 30 percent of world oil use, and imports are only 40-50 percent of US demand. Any drop in oil prices from a decline in US demand will be partially offset by increases in other countries’ demands. Even proponents of an active oil import control policy usually conclude that the direct value to the United States of unilateral import restrictions to reduce world oil prices is only a small fraction (4-8 percent) of the price unless the base price of oil is low and a very substantial import control program is deployed.

            From the critical point of view, the US economic history can be described using periods of energy and gasoline crisis and deriving particular policy patterns from them. Thus, the most recently gasoline prices spiked three times in 2000, once early in the year, once during the summer months, and a third time in September, reaching nearly $2 a gallon for unleaded gasoline each time. This was less than half and, in some cases, less than one-third the price paid in Europe. Europeans were not happy about the escalating price of gasoline. There were calls for tax relief in Great Britain, France, and Spain, especially from truckers. The price of gasoline topped out at nearly $7 a gallon in Great Britain, but the European reaction was mild compared to America’s reaction. The American public demanded action, ranging from immediate tax relief to the use of force against the 11-member Organization of Petroleum Exporting Countries to encourage them to export more oil to reduce gasoline prices. In February 2000, a Gallup poll found that 40 percent of American households surveyed said that the spike in gasoline costs had created a “financial hardship” for them (Sung, 14).

Reacting to the political tempest, Democratic presidential candidate Al Gore suggested that American oil companies were at least partially to blame, accusing them of price gouging and collusion. Republican presidential candidate George W. Bush, who had ties to the oil industry, countered that the Clinton-Gore administration had not done enough to pressure Saudi Arabia and other oil-producing nations to increase the supply of oil and had supported policies preventing the opening of oil fields in the United States. The oil companies and various other oil-related industries argued that much of the price increase resulted from environmental safeguards requiring refiners to manufacture and oil companies to sell reformulated gasoline containing relatively high levels of oxygenate in areas where air quality failed to meet national standards. They wanted those environmental standards suspended so motorists in those areas could purchase “normal, ” less expensive gasoline.

Elected officials at all levels of government ducked for political cover. Congressional members took turns on their respective house floors denouncing the price increases and offering their proposed solutions, ranging from a temporary suspension of part of the national government’s gasoline tax, to releasing oil from the nation’s Strategic Petroleum Reserve to ease oil prices. Several governors announced plans to suspend a portion of their state fuel tax. Indiana’s Governor Frank O’Bannon, for example, suspended that state’s 5 percent sales tax on gasoline. The first two gasoline price spikes were short-lived as market forces, in the form of higher exports from Saudi Arabia and other members of the Organization of Petroleum Exporting Countries, caused prices to moderate.

The third price spike moderated following President Clinton’s announcement on September 22, 2000, that he was ordering the release of 30 million gallons of oil from the nation’s 590-million-barrel Strategic Petroleum Reserve. This was just the second release from the Strategic Petroleum Reserve since its inception in 1973. The first occurred following Iraq’s invasion of Kuwait in 1990. Republicans claimed that the move was a political ploy to bolster Democratic candidate Al Gore’s presidential campaign, especially in the Northeast, where consumers were worried about the price of home heating oil. President Clinton countered that he was tapping into the reserve to assure that no American would have to choose between food and heat during the upcoming winter heating months.

As it is evident from the example of gasoline crisis of 2000, and which cannot be compared to the crisis 2005, for the US the trend of constantly rising gasoline and heating oil prices does not lay in short-medium time projections. Logically, it impacts on the key economic indicators. US Real GDP growth is expected to slow down to 3.5% in 2005 and 2.9% in 2006 after reaching 4.2% in 2004 (EIU ViewsWire, 2005). The explanations of the economic slowdown in 2005-06 are based on the influence of monetary tightening on the financial health of the personal and corporate sectors on one hand, and energy costs on another.

From statistical viewpoint, the US gas and oil industry is obsolete. Employment in the oil and gas industry in the US peaked in 1982 and has decreased steadily to a point today that is about one third of what it was at peak (Card, 29). The number of US oil and gas jobs lost approaches 1 million. Some of this reduction is related to the technology advancements that make scientists more efficient today than ever before, and some is related to mergers and downsizing. There is most certainly an efficiency floor to this trend. Moreover, age demographics in the industry are perhaps more critical. More than 60% of geoscientists in the oil and gas industry today are over 45 years of age, and fewer than 18% are younger than 35 (Jusko, 53).

The United States is facing an interesting dilemma in the coming decade. Oil and gas companies recognize this, but have been slow to respond. Young people today are well-informed. They know where the jobs are, and they know where the federal government is investing, so it is no coincidence that enrollment in geoscience and petroleum engineering departments at universities across the US peaked in the early 1980s and has decreased by approximately 70% to a point equivalent to mid-1960s enrollments (Jusko, 54). For the next 50 years as the country transition from a global coal and oil economy to a natural gas and hydrogen economy, it is vital that it has trained scientists and engineers in universities because all phases of the energy business – exploration and production, environmental management, and carbon sequestration – rely on trained and educated students.

In the contrast, in the US inflation for the last nine months has been averaging 2.5% (EIU ViewsWire, 2005). However, in August new increases in oil prices will result in shifts of energy components of consumer price index fore the entire year 2005. Logically, energy costs increase production costs in most sectors. As US consumers are facing higher petrol prices, the average inflation is expected to increase to 3% for all year 2005. According to Mike Fitzpatrick, vice president for risk management at brokerage house Fimat USA “you’re starting to see consumer resistance to higher price…you weren’t seeing it at $45 or $50, but at $60 and higher you start to see a ripple-out effect” (Farivar, C7).

In May 2004, NPD Group reported that 28 percent of American consumers indicate they have purchased less gasoline than usual. In their report “Pain at the Pump: Consumers Reaction to Record High Gasoline Prices” NDP Group researchers revealed that in addition simultaneously with cuts imposed on extra money spending on fuel, America consumers  say they will reduce spending on clothing, eating in restaurants and various forms of entertainment in order to save money (Maloy, 2004). From the critical standpoint, it is evident fact that the $2-plus consumers are paying for gas is getting to be too much, and will surely result in cutting back on vacations, which in turn will have a ripple effect on the travel and tourism industry.

According to David Portalatin, NDP Group’s analyst, American consumers indeed take serious steps to reduce gas consumption, which constitutes “a major change in consumer behavior” (Maloy, 2004). However, Portalatin claims that although America witnessed a lot of noise and protest during the first $2-per-gallon spikes, there was no evident decrease in the gasoline demand. In 2004, the break of symbolic $2 price mark has been a logical sign for consumers to act. NDP Group reported that surprisingly, gasoline prices affected not only vacations plans of American consumers, but changed traditional patterns of commuting. Thus, 20 percent of the sample indicated that they have tried carpooling, telecommuting, or taking public transportation in the past three months. 14 percent of polled citizens told that they would like to buy a more fuel-efficient car in the next year. As Portalatin points out, “gasoline takes such an increased share of the wallet that consumer spending suffers in other areas” (Maloy, 2004).

Although the tourism industry remains optimistic, some acknowledge that if gas prices rise much higher, people planning to drive to vacation destinations might drop those plans or take trips much closer to home. Survey USA commissioned by WFLA, News Channel 8, aimed to ask 500 Florida area residents whether the price of gas has caused them to change plans for summer driving vacations. The survey found that 32 percent of vacationers had canceled their summer plans because of the price of gas. An additional 26 percent had changed their plans and would go to a closer destination, but 37 percent said they did not expect to change their plans (Diamond, 1). The Travel Industry Association (TIA) disputed the survey and noted that the survey did not reflect how gas prices are affecting the tourism industry in Florida or nationwide.

According to Dexter Koehl, another representative of the TIA, “people might say they are going to cancel their vacation …but what we’re finding is as long as gas is available, that they are slightly altering what they do on their trip to save money in other ways” (Diamond,1). In addition, Koehl noted the average road trip for a summer vacation constitutes 800 miles. He asserted that based on the increased cost of gas in April, such a trip would cost $20 more than last year. However, even the trade group’s annual summer travel survey, released last week, predicts only a 3.2 percent increase in leisure travel from last year’s summer season.  Some consumer groups say the Survey USA numbers should not be dismissed and might accurately reflect consumer sentiment. Bill Newton, executive director of the Florida Consumer Action Network, a Florida-based group, indicate that high gas prices are causing people to consider canceling summer driving vacations (Diamond, 1). He claims that callers to the organization have expressed concern that gas prices might force them to change plans.

From the critical point of view on the circumstances in tourism business and those threats oil and gas industry imposes on the former, there are various both short- and long-term solutions. Indeed, American citizens may refuse from using conventional SUVs, and choose more efficient energy saving vehicles. In addition, hotel owners in Florida may offer different bonuses for tourists coming from the Northern States or special compensation packages for gasoline. Interestingly, if the TIA’s data is correct and the additional spending on the coming vacation constitutes only $20 more comparing to the year 2004, than perhaps, the main controversy lies in a different perspective. It is evident that spikes in gas prices affect American consumption patterns, which affects not only tourism but the entire US economy. Therefore, it is vitally to implement effective national energy program that will facilitate the solutions for the upcoming crisis.

In human resource sector, increased gasoline prices also took their tall: to encourage employees to work, US companies either adopt new policies and supporting programs (coupons on public transport, special reimbursements) or prepare policies for telecommuting employees because of such recent innovations as more-common broadband connections and web-based collaboration tools (Kaplan-Leiserson, 12). In contemporary context, such results are troubling, because retail price has a tendency to keep closer to $3/gallon. In addition, during September-October the cost of diesel climbed $1.09 a gallon from a year ago, which represents significant concern to the trucking and transportation industry.

Energy crises following hurricanes Katrina and Rita impacted greatly not only consumers around the country but also, and possibly primarily, business enterprises. For instance, with the combination of Gulf-related product shortages and higher gasoline prices, wholesale seafood costs already have risen by 5% to as much as 15% just in September-October 2005 (Prewitt, 2). Seafood industry specialists describe the damage to the industry’s infrastructure as to catastrophic, and many of them fear that the industry will only be a fraction of what it once was.

            The United States retail sector also experience problems associated with increase gasoline prices and energy costs. Owners of Class-B apartment properties are the most vulnerable to price spikes, since their tenants are least likely to absorb rent increases to cover higher energy costs. Between mid-year 2004 and 2005, even as energy prices soared, the energy pass-through was not hampering rent growth. Data from New York-based Reis Inc shows that national occupancy inched up to 94.6% over that period, and effective rents rose from $856 to $874 per month (Chapman, 10). According to analysts, the weakest local economies are the most vulnerable to rising energy costs because many of the tenants just can not afford to pay more rent.

From the critical point of view, the US government should seriously address the country’s energy programs, because traditional importing no longer solves emerging problems. As the Petroleum Industry Research Foundation points out, U.S. refiners are churning out gasoline at unprecedented yields, meaning they are squeezing more gasoline out of every barrel of crude oil they process (Herrick, A2). Practically, the answer is embedded in alternative and renewable sources of energy, and here the intentions of the US government look optimistic, at least on paper. The US administration supports incentives in the Energy Bill for renewables and recognizes the need of a national energy policy and the elimination of impediments within the energy permitting system. As such, the National Energy Policy (NEP) was developed by the National Energy Policy Development Group and was finalized on May 16, 2001. Shortly after the implementation of the NEP, the president issued the Executive Order for the establishment of the task force to work on the elimination of impediments and to assist the federal agencies in establishing a better approach in managing energy within the United States. On June 15, 2004, the House passed a National Energy Policy bill H.R.4513, the Renewable Energy Project Siting Improvement Act (Middleton, 5).

The bill streamlines the process to bring more environmentally-friendly renewable power projects online. This is another step in meeting the energy demands within the country by keeping the environment secure.  Subsequently, in response to Executive Order 13212, the White House Task Force on Energy Project Streamlining was formed.  Specifically, the role of the task force is to monitor and assist the agencies in (1) expediting permit review or undertake other actions to accelerate the completion of energy-related projects, increase energy production and conservation, and improve transmission of energy, and (2) setting up appropriate mechanisms to coordinate federal, state, tribal, and local permitting in geographic areas where increased permitting activity is expected (Middleton, 6). The first phase activities and accomplishments were many, mostly falling in the areas of assisting in the resolution of bottlenecks in a number of specific energy projects.  During the second phase, the task force has been working with federal agencies and state and local governments involved with energy permitting in the Rocky Mountains.

The objective of this work is to build federal and state partnerships to promote a more effective management strategy for energy development and energy policy on federal and state public lands in the Rocky Mountain region (Middleton, 7). The effort focuses on a three prong approach: developing federal and state partnerships for long-term management of renewables and non-renewable energy resources on state and federal public lands; allowing more forward looking and strategic planning on a regional basis for the environmentally responsible development, production, and distribution of the nation’s valuable energy resources; and developing processes for early collaboration and consultation among the state and federal agencies responsible for managing, authorizing, consulting on, reviewing, or certifying renewable and nonrenewable energy projects on public land.

            The administration’s budgetary focus on long-term energy efficiency and renewable energy ($1.25 billion) and fuel cell and hydrogen technologies (approaching $500 million) is forward-looking and laudable (Tinker, 18).  Federal recommendations to support research and technology to investigate efficiency, and also long-term, large-scale, future sources of energy including hydrogen (from methane and other feedstock), nuclear, and solar (large-scale, improved efficiency) that will not otherwise be developed in the private sector are reasonable. Other “renewable” sources such as wind, hydrothermal, biomass, tidal, and the like will provide good supplemental regional sources but are unlikely to provide the scale of energy needed in a modern society. Although heavy investments have been made historically in such renewable energy sources, for more than 4 decades their contribution to US energy consumption has been less than 1%. Moreover, they are geographically constrained and limited in their use in the transportation sector. Nuclear and hydroelectric power plants combined currently constitute approximately 10% of US energy consumption, but because of environmental concerns, no new plants or dams have been constructed recently. Consequently, their role as a future energy source is diminishing.

The federal government should support a smooth transition away from solid and liquid fossil fuels over the next 50 years toward other energy sources. A global natural gas industry is likely to be established during the next half-century that will serve as a bridge to the hydrogen future because natural gas represents a reasonably clean transition fuel, as well as a feedstock for hydrogen. Federal investment should include broad support for research and technology development in conventional natural gas but should expressly focus on the identification, characterization, production, and transportation of unconventional natural gas resources. The unconventional gas sources are rarely associated with oil.  Unconventional natural gas, such as tight gas, methane, and shale gas, represents on the order of 30% of total US natural gas production today and is virtually untapped as a global resource (Card & Hans, 31-32). In the last 20 years, data show that federal and private investment in research and technology, private sector investment in exploration and development, and federal and state incentives combined to create new unconventional natural gas resources in tight formations, shale, and coal. From the critical standpoint, only long-term and vast national programs can bring effective changes in the US energy crisis. 

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