Necrotic Obsession

MIDLAND, Texas (MarketWatch) -- After hurricane Katrina, a shortage of supply caused gasoline prices to rise rapidly, (just as a surplus in supply would have caused the price to fall. This always happens in a free economy.) Indications are that with the run up in gasoline prices, conservation kicked in, and we used less gas.

Katrina had caused 12% of the U.S. refining capacity to be shut down. Then came Rita, and we saw another 22% of the refinery capacity shut down temporarily. But other than spot shortages along the evacuation routes for Rita, we did not see any gasoline shortages in the U.S.
Gasoline inventories rose for weeks ending Sept. 5, 2005 and Sept. 12 2005. Then, for week ending Sept. 19, 2005, gasoline inventories rose an amazing 3.4 million barrels. In fact, demand had declined to a point where we actually encountered no widespread shortages of gas anywhere in the U.S., in spite of the loss of about 1.5 million barrels per day in refining capacity.

So let's face reality: the only way the American people will conserve gasoline is if the price is high enough to cause them to cut out unnecessary trips, to acquire more fuel efficient vehicles, to form car pools, and to use mass transportation.

The reverse of this occurred back in the '70's when disastrous price controls were implemented by the Federal Government to keep gasoline prices low. With low costs for fuel, there were no significant efforts by drivers to conserve, and we quickly ran short of gasoline. Politicians seem to have the impression that every American is entitled to life, liberty, the pursuit of happiness, and cheap gasoline for their SUV's, so public policy has been to maintain low gasoline prices

Price and demand

Data from the developed countries dramatically show that gasoline consumption per capita is directly related to the price the consumer pays for gas. Of course everyone says that is to be expected, but one look at the table below shows how dramatic this relationship is. European countries and Japan have for years maintained high gasoline prices with taxes on fuel. This was done primarily because these countries had little production of domestic oil, and they needed to minimize the cost of oil imports.

The U.S. consumption has been running about 450 gallons of gasoline per capita per year, but other developed countries consume only 100 to 200 gallons of gasoline per capita per year.

It would be overly optimistic to expect the U.S. to match these consumption figures, but certainly 350, or maybe even 300 gallons per person per year should be achievable. Figure 1 indicates that with $3 plus gasoline, the U.S. per capita demand will fall to about 300 gallons per year -- a 33.3% reduction which will occur in time, after everyone takes steps to reduce their use of gasoline, and the U.S. has time to develop more mass transit. With high fuel costs for many years, these other developed countries have developed efficient mass transportation, and it has been heavily utilized because it is much more economical than driving one's car. So it is reasonable to expect that over a period of time, mass transit systems in the U.S. would be much more fully developed and utilized if gasoline prices remain high.

The cause and the end

The root of the problem is world demand for crude oil is growing rapidly, with much of the growth in China and India. The vast majority of our oil worldwide is produced from old "Giant" fields, and these fields are now mature, and have begun to decline. It even appears that Saudi Arabia production is at, or near its peak production. (See "Twilight in the Desert," by Matthew R. Simmons.) While new oil is being discovered, it is in smaller fields, sometimes remote, and it takes many of the new, smaller fields to replace one of the old "Giants." So what this means is we are running out of oil worldwide, and we have already run out of cheap oil. As this occurs, the price will rise, reducing demand.

What about alternatives?

Ethanol, biomass fuels, and maybe even hydrogen are potential alternate fuels, (and certainly should be developed wherever possible.) Alternate fuels are expensive to make, and they become attractive economically only when gasoline prices are high and/or with tax abatement subsidies. However, these alternate fuels never can be made in quantities sufficient to replace the gasoline we use today, and will always be supplemental to our main energy supply. Anyone who expects these alternate fuels to eventually replace gasoline is simply daydreaming. Also, shale oil is another source of high cost oil.

Bottom line

When you put all of these factors together, one can readily realize that the days of low cost gasoline are over. We Americans need to bite the bullet, and start rearranging our lives and our infrastructure to be able to live with, and make our economy progress with, high cost gasoline. The sooner we get started, the sooner we can get our lives adjusted to live with high cost gasoline.