Questions on gas prices

Going into Memorial Day weekend and the start of the summer driving season and gasoline prices are at $3.22/gallon,  approaching the all-time record of $3.29 (inflation adjusted).  There are a number of reasons for this: some are transient, such as refinery tightness, social inequities in Nigeria and other oil producing states, etc; some are structural, such as peak oil, the way our society and economy are set up, etc.  The long term trend in gasoline prices appears to be volatility overlying a constant increase.

My contention is that at $3.22/gallon we cannot afford such cheap gasoline. The costs we've so conveniently externalized are building up and will be paid, one way or another, with interest. On the other hand, the way society is set up, at 3.22/gallon we cannot afford such expensive gasoline. So it is high time to ask some questions.

First off, although I think gasoline in this country is much too cheap, it would be ghoulish to revel in price rises. Real people get hurt, some badly.

Secondly, should the price of gas dip in the near future, it would be idiocy to take relief in that. That's the behavior of the addict.

Thirdly, nobody has a crystal ball.  Nobody knows what's going to happen. But there are big flashing warning signs all over the place -- it takes real force of effort to avoid them.

On to the questions:

If you think the price of gas is too high, why do you think that?  Several things to consider.  

In the short term we have a refinery crunch, supposedly for maintenance that has been put off for too long (in which case gas has definitely been too cheap). But see also here.  Some would claim manipulation by the oilcos.  Perhaps, perhaps not, but in the big picture irrelevant. Blaming the oilcos is like the addict blaming the dealer. In any case, Matt Simmons notes that we are looking at record low gasoline inventories heading into Memorial Day.  Gas this summer will not be cheap.  And yet even as gas prices have increased our driving has not decreased. A Washington Post and ABC News poll found that it would take $4.38/gallon to get drivers to cut back significantly.

In the long term there are serious structural problems. At this point even the oil companies concede that oil is a finite resource, and the only question is when it will peak (that is, if it hasn't already). Estimates range from November 2005 to about 2020.  Those at the 2020 end tend to include significant contributions from "undiscovered reserves" and unconventionals.  Undiscovered reserves is exactly what it sounds like: we haven't discovered them but we'll book them as reserves anyway. Unconventionals include tar sands, shales, and the like. It's probably worth keeping in mind that Middle East proven reserves are almost certainly inflated by about a factor of two.

Remember also that as energy return on energy invested drops, the net flows will become appreciably less than the gross reserves bandied about. Not an issue when EROEIs were 100:1 back in the good old days, but new production is down to 8-10:1 (10-12% of the energy in a barrel had to be used in extraction and production) and unconventionals even lower. Technology helps us find and extract more and more petroleum but the fact remains that discovery-consumption gap keeps getting increasingly negative (borrowing a slide from Energize America). In the end, there is only so much oil to go around, and all of the indications are that we are at or near peak. Ultimately we will have demand destruction: it can be enforced on us by recession, or we can do it on our terms.

You might also check out retrograde's excellent diary on the subject America and gasoline: myths and reality.

Do you expect the price of gas to come down and stay down? Not talking about short term volatility here, but long term trends. If you do, could you kindly give us a compelling argument for it? If your job requires a lot of driving, how do you see things panning out in the next 1, 2, 5 years? If the cost of gasoline is a hardship (or even if it isn't), how do you see things panning out in 1, 2, 5 years?

If you think gas prices are a problem, what do you propose we do about it? Open to effective suggestions here. I prefer the idea of a carbon tax, phased in slowly enough to blunt the shock and quickly enough to change our behavior in a timely manner. Yes it will make gas more expensive but it will get more expensive anyway. Several things will be necessary. The entire tax code will need to be reworked to mitigate (and for the poor, eliminate) the regressiveness of the tax. We will have to be flexible because if it works, revenue may go down and we'll need to be able to raise revenues some other ways if that proves necessary. Diesel taxes will probably have to go up more slowly than gasoline: we are far too dependent on trucking. The carbon tax also naturally provides for disincentives to coal and carbon intensive unconventionals. But the tax is not just Pigouvian, it also pays for real costs incurred and currently externalized.

If you think the market will solve this, remember that is the market that got us into this mess of total dependence on oil and a love of the big car. If markets are going to play a role (as they must) we must put a price on carbon.

We are facing a sea change, and it will take time to adjust. We need to invest in urban planning, sustainable agriculture, electrified transport, and alternative energy. We need to take the lead on this and not to have to buy our technology from the EU, Japan, or China. We as a people must recognize physical reality is something to be accepted. We as individuals must take responsibility, because in a democracy we are in charge.

If you think gas prices are a problem, when would be a good time to start dealing with it?. Sure it would have been better to have started 30 years ago, as Carter and even Ford foresaw. We've had flashing signs and warning klaxons for years -- what more do we need to get moving? The longer we wait, the more painful it will be.

What is a fair price for gasoline? When we pay for a gallon of gasoline, do we include the costs of climate change and ocean acidification? Air pollution? Oil spills like Exxon Valdez? (18 years on Exxon is still appealing a $2.5B fine -- reduced last year from 4.5B + interest -- for the spill). Subsidies for urban sprawl? Securing oil supplies in hostile and unstable parts of the world? Maintaining social inequities in oil producing countries like KSA and Nigeria? Milt Copulos, president of the not exactly left leaning National Defense Council Foundation, estimated that gasoline from Persian Gulf oil really costs $10.86/gallon (the PDF link is worth reading, even as I disagree with some of ideas). Do we recognize that gasoline competes with other petroleum products, and that oil underlies not just transportation but agriculture, pharmaceuticals, textiles, just about any industry we care to name?

I do not look forward to more expensive gasoline, even though I no longer use it directly. I do recognize that the price at the pump is much less than the actual cost, and that the price will go up anyway, in unpredictable spikes if we are not proactive in seriously addressing the problem. I also do not think that sticking one's head in the sand and lashing out at easy targets is any kind of solution.

Finally, an open secret about gasoline and oil in general. Production is ultimately limited by geological factors, and we can't put more oil into the ground. The real problem is production vs consumption, and consumption is entirely under our control.