Ed Ellingson's Blog


11. Answering a post, “So what is your plan when gasoline hits $10 a gallon?

This is my response to a blog post on LinkedIn (Link up Milwaukee group) that asked, “So, what is your plan when gasoline hits $10 per gallon?”

A very interesting question. My initial thought was, “Will we ever see $10/gal.?” followed by, “How will the coming oil shortage play out?”
Oil peaked at $147/bbl. and gasoline was about $4.00/gal. then, and it put us into a world-wide recession. People need a certain amount of the the energy (oil) but cut back on it only a little (reduce travel, for example) and cut back on expenses somewhere else, like reducing vacations, recreational vehicles, luxury items. The drop in economic activity reduced the demand for oil, and the price dropped. Oil dropped to about $35 and is now up to about $80/bbl.

It seems that the trend will be swings like this, where a low price spurs some economic activity, but the activity uses oil, increases demand, and drives the price up. Demand drops at the higher price, causes a downward pressure on price, and the cycle continues.

When the price is high, oil companies and other investors start new projects to extract oil for deeper formations, smaller deposits, lower grades of fuel, and less accessible locations. Some consumers try to buy more fuel-efficient vehicles, move towards mass transit, and take thousands of other steps to reduce our energy requirements, but these all take time (everybody can’t go out and buy a hybrid tomorrow). But as the economy collapses and the price of oil drops, these moves don’t make economic sense, so the energy projects stop and the purchase of hybrids falls off again, and many, many economic decisions are made that perpetuate the cycle.

One way out seems to be to artificially raise the price, basically adding a tax, to make this happen in an orderly fashion; guaranteeing everyone making an “investment”, like oil drillers and car buyers, that the price of oil will remain high. This is something that’s hard to do in a democracy, or in any reasonably free society. An edict like this could anger an electorate, and politicians are sensitive to this. A politically-mandated recession; is it possible?

So the only possible solution is to “encourage” people to make the investments required to keep the oil flowing and to reduce the demand for oil. So the government takes oilfield “security” in hostile areas and eliminates the need for expensive pollution control features (on the supply side), and then gives tax breaks, lots and lots of tax breaks, on the demand side to try to get people to get people to make that economic decision to invest in energy efficiency. Also beat the patriotic drum; “buy a hybrid, or a full-electric, or put solar panels on your roof; it’s the patriotic thing to do.” This can have some affect, of course, but it’s hard to believe that it could have a substantial impact.

So, will we ever see $10/gal?  I don’t think so.  We’ve seen that something like doubling from where we are now absolutely ruins the world economy, destroys the demand, and results in lower prices.  So it’s demand-controlled pricing.  The only way that will end is when there’s not enough oil to meet demand even at the very high prices, such that governments start to worry about the military not having enough fuel, and the police and fire departments, and emergency vehicles, and farmers and truckers not having enough fuel to get food produced and delivered to markets.  When there gets to be a real pinch and the government can’t be a part of a bidding war, they’ll just mandate that they get all they want first; a rationing system.

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