Feb 14th 2012, 21:19 by R.A. | WASHINGTON
THE last few years have been full of ups and downs for the American economy, but one unpleasant trend has been a constant. Each year since 2008, an economy seemingly regaining its footing after a difficult winter has found itself facing the drag from rising petrol prices. American output switched from contraction to expansion in early 2008, only to sink under the weight of spiking oil prices, which added greatly to the pain of the housing and financial crises. The green shoots of 2009 struggled to sprout amid a more than 50% increase in the cost of a gallon of petrol between January and July. The same pattern played out again in 2010. In February of 2011, private employers added 257,000 workers—the same as they did in January of this year—but the recovery nearly collapsed as unrest in Libya sent petrol prices back above $4 a gallon. Journalists are already writing stories on the possibility of a repeat performance in 2012, even without a major crisis in Iran. The cost of a gallon of petrol has risen more than 20 cents from the beginning of the year (it now sits at about $3.58), and much more of a rise is likely as summer approaches.
There is some reason to hope for a better outcome this year compared with 2011, and certainly 2008. That is, simply, that demand for petrol is more price elastic over the long term than in the short term. That is, the longer the market is confronted by expensive petrol, the more willing consumers will be to alter their consumption patterns, and the better the market will become at supplying substitutes. A greater share of vehicles on the road should be highly fuel-efficient, for example, allowing households to handle a rise in petrol costs without having to reduce expenditure on other items as much as they might have previously. The impact of an oil shock, in other words, should be reduced.
The chart at right provides one look at why consumer reactions to expensive petrol might have changed. In the five years prior to the oil shock of 2007-2008, petrol prices were virtually never above $3/gallon; the increase in costs above $4 was an experience unknown in the recent past. When the Libyan crisis hit early last year, consumers had still only become accustomed to seeing petrol prices over $3 about 30% of the time. Such costs are very nearly the norm now, however. For nearly half of the past 5 years, petrol has cost more than $3 a gallon. That's the sort of persistent expense to which a household will adapt and adjust.
It wasn't impossible to imagine that cheap gas might return back in 2007. By 2012, it's clear that dear petrol is a reality for the foreseeable future. Luckily, that change in expectations should help soften the blow from a higher price at the pump.
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redply to A-fool: pump-price today in Scandinavia is in excess of 10 USD, but then we have balanced budgets. How about comparing pump-prices and budgetdeficits in the US,Greece and Iran on one side and those fools adhearing to the Euro Pact on the other?
Agreed - with the comment about the stupidity of the argument regarding the elasticity of demand. The article is a complete non sense that relies on a totally inaccurate and blind optimism, unaware of realities.
The realities are as follows:
1) Even at 4 dollars a gallon, gas is insanely inexpensive in the US and in complete inadequacy with the real price it should be at. Have a look at the "real" prices of gas in other western countries and sadly, people in the US should be grateful that gas is still so low in America. Obviously, though as the very vast majority of us, human beings, is greedy by nature, any resources that's available abundantly will be greedily consumed without the slightest sense of responsibility. In this regard, learning and acceptance are very slow in all countries all around the world, but in the case of the US, the sickness is very much acute and the country is for sure set to keep the palm of the most wasteful land for a long time again. Price of gas is bound to keep increasing, again and again. This is an unavoidable trend that will keep worsen and the American people should seriously start adapting their consuming behaviours.
2) This is not all your fault though. Blame it on the lobbying of the US oil industry and the US car manufacturers. You guys are ridiculous with your big cars with automatic gear shifts that are crazy greedy on sucking oil at the fastest speed ever in the engine. Your most fuel efficient cars would be as efficient as a car manufactured in the late 80s / early 90s in Western Europe. This is ridiculous.
After the big surge that took all the American people by surprise in 2008 (and I remember it very well as I was actually in the US at the time it was happening), maybe now is the time to finally really change your approach to resources consumption at a very broad level?
Demand is more price elastic over the long term than in the short term.. R.A. in Washington, you're killing me!
Demand is not elastic - how absurd. Only someone who is totally out of touch with reality would think that your average household, when hit with rising gas prices that they can't afford, would be able to go out and buy a new, more fuel-efficient car in an attempt to offset the higher cost of gas. People who are out of work or barely getting by (as so many are) can't just go out and buy a new car. New cars mean getting a loan and probably paying more per month to have the new car than to keep the old one.
Plus, I don't see any substitutes popping up in the market or any major changes in transportation. Until there are other options readily available, demand can't possibly be elastic.
Walking, cycling and public transportation spring to mind as alternatives. Is it physically or culturally impossible to consider that in the Good ol' USA?
Indeed, if consumers really want lower motor-fuel prices they'd better suffer the indignity of seeking alternative modes of transport and just buy less of the stuff. That has the effect of reducing demand, reducing price (yes, elasticity) creating more competition for less business among the oil cartel and a fairer market. It's win for everyone including some reprieve for the poor old CO2-laden atmosphere.
Is it impossible? Absolutely not. I personally don't own a car and only use those methods. However, I live in a city where that is possible and have a job that is accessible by transit, whereas many (if not most) people in this country do not. Thanks to suburban sprawl and our lack of realistic planning, many people live too far from their jobs to bike and have minimal, if any, access to public transit. I don't know the statistics, but I venture to guess that the majority of Americans have no choice but to drive to work. When you have no choice and are stuck with what you have, that is completely inelastic.
Besides, we really need to consider more than just households here. I addressed households because whoever wrote this article was brain-dead enough to suggest that people just run out and buy new cars when gas prices go up. Another big, inelastic part of the market, however, is shipping. The truth is there is no other way to move goods from one place to another. You can't use a bike or public transit to distribute goods.
Yes, the answer is as simple as that. It is unfortunately culturally impossible. Your courageous walkers, cyclers and public transport users will always look damn pale next to the greedy gas users that account for the vast majority of people in the US.
When will the world wake up to the effect of oil depletion on the growth-dependent financial system, that growth is no longer possible in an economy constrained by overuse of natural resources and the climate impacts thereof?
There is no end to the decline of industrial civilisation without acknowledging this truth.
I found this is an AP news story.
Oil up to near $102 on halt of Iran crude exports
Still, a report edited by U.S. energy trader and consultant Stephen Schork forecasts oil prices will fall due to caution in the U.S. at the gas pump after a report showed January retail sales grew only modestly.
"Consumers are spending, but with higher food prices and new iPhones to buy, they are not spending at the pump," Schork said.
---
A poor excuse (silly explanation) is better than none.
Regards
Its such a shame that instead of all the spending and effort that has gone into developing "green" industries, we haven't instead made a serious effort to adopt natural gas as an energy alternative. Its cheap, plentiful, clean, domestically available, and the conversion necessary to transition to a natural gas run economy is so much more viable than all of the moronic longing for impossible electric cars powered run by scarce electricity from wind mills or whatever.
Imagine if instead of flushing all the stimulus money down solyndra-type-toilets, it had been mandated that all government vehicles be run on natural gas. This would create an industry over night, and quickly freight haulers would follow suit as natural gas infrastructure would spring up across the country as existing gas stations simply adopted the necessary extra pumps and tanks. The conversion of a semi-truck or other automobile to natural gas power is a simple and relatively cheap one. It wouldn't be long before your average consumer followed suit. Its a damn shame.
I suppose that between environmental/green interests, and petroleum interests, such a reasonable plan never stood much of a chance of being adopted.
The most ironic thing about the democratic party and environmentalists official endorsement of the electric vehicle is that the other great supporter of a transition to electric vehicles is the coal industry. Filthy, wasteful electricity is the least efficient form of energy.
It would take at least a decade or more to completely transition the auto fleet to natural gas and even longer to set up the infrastructure for transport & distribution stations. All this for of course U.S. natural gas reserves which would last at most about 12-15 years if you did this.
It is a loser idea except for maybe certain large vehicles. Eventually we will head to electric vehicles for transport given that the power sources to generate electricity including nuclear, hydro, and especially coal are readily available for a long-time to come. The question is only how fast this transition will take and over what time frame.
Frankly, thats bunk, and you havent provided any evidence to support that claim. Boone pickens sees things quite differently than you. Do you honestly think the creation of totally new,impratical electric vehicle infrastructure is easier than a switch to natural gas, a proven technology ,which merely requires a modification of current infrastructure to implement. Ive heard figures from 250-500 years energy and current consumption levels can be yeilded through naturwl gas. I refer yiu to http://www.pickensplan.com/ as your knowledge of this wonderful energy source is lacking.
Consumers in both Canada and the United States pay far less for gasoline than most European countries for one reason; low excise taxes. Americans pay among the lowest level of taxes on gasoline in the world, less than one-tenth of that paid in Europe as shown here:
http://viableopposition.blogspot.com/2011/09/americas-gasoline-excise-ta...
With both countries fighting rising debt levels, we may find that Washington and Ottawa are ultimately going to be very tempted to raise gasoline excise taxes to achieve the fiscal balance they so badly need.
Right, people in Europe pay $40 a gallon.... Er, 20 quid per liter. I believe that.
The quote was 4 times the tax, not 4 times the full price. I'm not an expert, but I do remember doing such a compare back in the 1980's, and the answer was in high multiples... as in 7x or 8x if I remember correctly. Here is an example with made up numbers, not sure if I'm in the right ballpark, but just to show how tax can be 10x the US rate while pump price is only about 3x (which was about right at one point if I recall correctly)
US UK
Base Price 3.00 3.00
Tax 1.00 10.00
Pump Price 4.00 13.00
In the UK, it's currently around 135p per litre as an average - that's 612.9p per gallon (call it £6.13). That's $9.60 per gallon! About 80% of that is tax.
I wonder what would happen if US petrol prices ever ceased to be amazingly cheap - by most other people's standards. In the UK we are over $7/US gallon - welcome to the real world!
I'm already paying $4 in SF. I'm sure $5 is not far off.
Prices may be more elastic, but I doubt they're all that elastic.
Markets consider crude oil futures to be a relatively safe form of financial asset, because people will consume all the amount of crude oil produced within an accounting period, i.e. exchange its whole amount with money, within a meaningful time frame to investors. Crude oil is thus always considered rather scarce - just as money is. As for other items of goods, it is usual that people don’t consume the whole of the produced amount within a meaningful time frame to investors. Hence, markets find crude oil futures to substitute for money, particularly when the liquidity-preference is high, and it still yields better than money (Money marks zero yield).
Change of habits will take a generation so these expensive prices will neeed to be sustained.
I sincerely hope that cheaper gas is on the way for the future. The economy is most certainly in the dumps and if things do not get better soon I think we can count on another Great Depression.
-Felicia Fisher POL101CA
The Black Swan Event is an attack on Iranian nuclear sites by Israel or a preemptive attack by Iran on commercial shipping lanes forcing a blockade in the Strait of Hormuz. Placing anti-ship mines and sinking supertankers would shut down 30% of world petroleum shipments.
Both Israel and Iran seem strident and defiant to impeding deadlines.
Israel has previously bombed Iraqi and Syrian nuclear sites.
Iran has previously mined the Hormuz Strait.
Israel is facing Iranian nuclear progress that may reach a point of No Return.
Iran is facing escalating dire economic sanctions and world boycott, plus national elections. And now both sides are ramping up espionage, assassins and covert bombings.
And both are waging a proxy war in neighboring Syria.
There will be Bombs in the Mideast...Hopefully not nuclear.
If you want a gauge on gasoline prices, follow politics and war in the Mideast. High tensions lead to high prices. And everyone is having an aneurysm right now.
Gasoline would double if not triple overnight and would make $5.00/gallon gasoline seem like a bargain.
Bicycles are a good way to travel
Living in small town Hawaii, biking is the best year round.
However it is not always the best option in places that are not Paradise.
I would have thought a Hawaiian summer far too warm for comfortable biking.
(Then again, I expect you'll think me crazy for biking to work when temperatures hit -20 degrees Celsius last winter.)
it pretty much stays between 70-80 year round here.
Fuel-efficient vehicles? Ha, ha...Ha, ha, ha! American consumers are laughing at you, R.A. The Ford Explorer has been selling briskly, as well as F-Series trucks. The Jeep Grand Cherokee appears to be experiencing a surge in popularity. Toyota is expanding the production of its Highlander SUV. Few people in America are interested in fuel-sipping eco-boxes. Neither green cachet or a couple additional miles on the gallon is not worth the risk of getting pancaked in a crash.
Agree.
With all of the idiots yakking and texting while driving, one needs a safe vehicle.
Assuming one buys 10 gallons per week.
Would a 50% saving on gasoline (5 gallons x 52 weeks x $3.60) and a reduction of $936/year mean much when one buys a $25k car and needs a job for 5-6 years for the payments?
Regards
1. I'd say it's more that consumer expectations are now more oriented to instability. That has drag, meaning it reduces output, but people and thus businesses need to go forward - can't wait forever - so you plan more for instability. That is certainly not all bad: fewer long term commitments can mean greater flexibility, though some commitments - like infrastructure - requires longer promises.
2. If you remember, the difference now is we wouldn't have "oil shocks" like in the 1970's. Those tend to be mis-remembered in the partisan arguing over "stagflation" as the great bugaboo that must be avoided no matter what. In the 70's, we moved almost overnight from long-term expectations of low fuel costs to much higher and that drove inflation through the entire production chain - and caused wildly varying growth rates from year to year. We are now more in an era of uncertain expectations, so we should be better prepared for that.
Let's keep in mind that "oil shocks" have been the best time for oil traders to make tens of millions in extra proifts by speculating on crude oil prices from different sources destined to different countries. All crude is not the same and oil delivery patterns cannot be changed overnight just because some political leader says so. Many refineries all over the world, that have been designed to take specific grades of crude oil, simply cannot process heavier crudes with high sulphur content.
The net effect of disruptions in crude delivery patterns would soon lead to shortages of critical products such as jet fuel with critical impact on the economies of large trading nations. It would also affect sea shipments as owners of large cargo vessels scramble to avoid having their vessels caught in a war zone. Its not just the gas at the pump that will go up, trade disruptions will be widepread. Lets hope cool heads will prevail.
If I remember correctly, there were price controls placed on the oil companies in the 70's. So they limited output to dealers.
http://www.washingtontimes.com/news/2006/may/15/20060515-122820-6110r/?p...
BTW... 2008 was a nice quiet summer as gasoline went over $4/gallon here. The kids could not afford to joyride and blast their hippity-hoppity music.
(C'mon FOUR BUCKS!)
Regards