Beyond $2

by Ted S. McGregor Jr.


It's kind of like a heat wave. You just endure it and hope for it to end. But what if it never does?


That's the possibility some experts are raising about the skyrocketing price of gasoline. Over the past month, gas prices in the United States have risen by more than 20 percent. Economists estimate that the increase translates roughly into a $40 billion drag on consumer spending. Even Wal-Mart recently announced that its own research showed its customers have about $7 less to spend each week as a result of the higher gas prices. Just this week, the national average broke the $2-a-gallon mark, even though Inland Northwesterners have been paying nearly $2.20 for a couple of weeks now.


The United States, with just 5 percent of the total planetary population, consumes a quarter of the world's oil. But now, as the rest of the world gets thirstier for light sweet crude, the supplies are being stretched thin.


"We've got a situation worldwide where demand is greater than it's ever been," says Dave Overstreet, public affairs director for the American Automobile Association of the Inland Empire. "That puts more pressure on imports because the demand is higher in places like China than it has ever been. Dependency on foreign oil is coming back to haunt us."


Surprisingly enough, the anger is not boiling over; Americans appear to be holding their breath to see what happens next. Perhaps they understand that gas is the most complex commodity price to gauge; experts say it's nearly impossible to predict. It's also perhaps the single most important commodity, as America's economy really does run on gasoline.


"It's been pretty quiet, but we're starting to hear more about the high prices," says Overstreet. "Airlines are adding fuel charges, and trucking companies are doing the same thing. It's been a continual progression of higher prices."


Consumers are reacting in some ways, however: Sales of the biggest SUVs were down 20 percent in April from the same month in 2003. And more reports of motorists driving off without paying at the pump are coming in all the time. But people are not driving less. In fact, demand for gasoline has increased by about 4 percent over last year at this time, says Overstreet -- caused in part, he says, by cars that use more gas. Overall, Americans are driving twice as many miles as they did in 1980.


"It's just complaints so far; nobody is junking their SUV to ride their bike," says Stephen Leeb, co-author of The Oil Factor: How Oil Controls the Economy and Your Financial Future (Warner Books), which predicts major oil shortages in the near future. "My guess is that there's going to become an inflection point out there [when people will change their behavior]. Is it $2 a gallon? Or $3?"


Some are already thinking about doing more than complaining, however. "I'm considering getting a bike and riding it everywhere," says Jessica Wiswell of Spokane. "I wish Spokane was better equipped with bike lanes, though."





Well Running Dry?


Leeb is a Manhattan financial planner who started looking at the oil situation because he wanted to be able to advise his clients on how to react to changes in related markets.


"At a certain level, when oil prices climb fast enough, it tends to lead to really bad things," says Leeb. "Every major recession in the past 35 years has been preceded by oil price spikes."


Leeb says the current price of about $41 a barrel isn't quite in the danger zone yet, but if it hits $45 or $50 it could get ugly. He says the high cost of oil will start to trickle through the entire economy -- it's already visible in things like the price of milk.


What worries Leeb the most, however, is that it appears that the world's oil producing system is running at full speed and that it simply can't keep up. The world's wells are pumping nearly as fast as they can, and U.S. refineries are running at 96 percent of capacity. And as vast populations in India and China seek the kinds of lives Westerners lead, he predicts the wells will start to run dry soon. (Nobody disputes the fact that oil is a finite resource -- the only question is how long it will last.)


Many pundits are referring back to the fleeting nature of the gas crisis of the 1970s, Leeb says, but that comparison is not at all valid. The problems at that time were created when the Organization of Petroleum-Exporting Countries (OPEC) made a political decision to cut production. Today the shortage is real. Such distinctions started to add up for Leeb as he researched his book, and soon he and his wife Donna, also his writing partner, were reacting to what they were learning as human beings, not as financial planners.


"I'm no tree-hugger -- this transcends environmental concern -- but this is an utter crisis," Leeb says. "It's frustrating as a parent. But we have the technology, why aren't we using it?"


Leeb advocates much less reliance on foreign oil imports, and to get there he envisions a massive wind turbine farm to be located in the Dakotas. It's not as far-out as it sounds; Stanford professors Mark Jacobson and Gilbert Masters published the plan in the August 2001 edition of Science, one of the most thoroughly vetted journals in the world. Leeb says for $500 billion -- a lot of money, but only $200 billion more than the currently projected cost of the war in Iraq -- this wind farm could service half of the nation's electrical grid. This would allow the U.S. not only to meet the Kyoto Protocols goal of emissions reduction, but it would also allow natural gas and other energy sources to be diverted to other uses. (Gasoline can be refined from natural gas and even from coal.)


Many people, however, believe there is plenty of oil to be found -- although the ones who hold this view and are quoted in news articles tend to work in the oil industry. The conventional wisdom from those quarters is that new sources in the Gulf of Mexico and around the Caspian Sea will add significantly to the world supply. And they point out that the time may finally be ripe for new investments in refineries; none has been built in the United States in 20 years. Exploration has been slowed, too, as relatively low prices have often kept new wells from penciling out.


But Leeb is not alone in viewing the high gas prices as more of a warning sign than a passing inconvenience. David Goodstein, a physics professor at Caltech, the MIT of the West Coast, agrees. In his new book, Out of Gas: The End of the Age of Oil (W.W. Norton), he makes the case shared by many geologists that the world is simply running out of oil. Part of the problem, he says, is the shell game used to determine reserves and to advertise new discoveries.


"If they have a bad exploration year, they can fudge it," Goodstein says of oil producers. "OPEC's proved reserves jumped 400 billion barrels a few years ago. That jump occurred because OPEC changed its quota rules. All that oil was discovered by politicians without digging a single hole in the ground."


The result is that nobody really knows, but the likelihood is that reserves are overstated.


"We do know that the peak for discovery was more than 40 years ago, around 1960," says Goodstein, who teaches thermodynamics at Caltech. "There will be a peak for production, and it may already have happened. All natural resources have that kind of behavior." Goodstein believes that if the peak of production has not already occurred, it will happen within the next 20 years.


"This is the most important problem we have. At the minimum, there will be a lot of inflation," he says, pointing out that petroleum is the base ingredient for 90 percent of the manufactured products we consume, from drugs to plastics. "This time, [gas shortages] won't be artificial. It will be forever."


Goodstein says there are alternative fuels, but adds that all of them are a lot more expensive than gas, which even at $2 a gallon is cheaper than bottled water. Essentially, there are no easy answers. That's not what Americans like to hear.


"I'm pessimistic," says Goodstein. "Nothing will happen until we have a crisis. Politicians are worried about the next election, not the future of mankind."





The Blame Game


And of course that's exactly how many people will want to view this issue -- through the lens of politics. Despite the fact that gas prices seem to be largely out of anyone's control, leading Democrats are hoping to pin the crisis on President Bush. They do have some decent ammunition. After all, three years ago, when the president released his concocted-in-secret National Energy Policy, he said the plan would ensure more supplies. Bush also has also said that his tax cuts would allow consumers to have more money to pay for higher gas prices. And just this month, his spokesman, Scott McClellan, said the president "remains concerned about rising gas prices."


Still, Democrats are asking the president to release some of the nation's Strategic Petroleum Reserve -- the 645-million gallon supply designed to keep the nation going for 60 days if imports are cut off completely. It's likely that such a move would cut prices, as was the case when President Clinton released some of the reserves during a price spike. But so far the White House is resisting the calls, perhaps saving the move in case things get worse over the summer, when demand traditionally is highest. Still, the nation spends $21 million a year to maintain the reserve, so if it can head off the kind of recession Leeb worries about, it will likely be tapped.


And chaos in the Middle East is playing a part. Experts say the current price of a barrel of oil is perhaps $4 to $8 higher because of the political situation there, which has been exacerbated, at least in part, by the American presence. Attacks on foreign oil workers doing business in Saudi Arabia last month, the bombing of a pipeline in Iraq and attacks on offshore oil rigs in the Persian Gulf are the most recent examples of terrorists attempting to hurt the West by pushing gas prices higher.


Finally there's the issue of how oil companies -- seen by many as some of Bush's best friends -- are profiting from everyone's pain at the pump. The Wall Street Journal has reported that oil companies' profits are up nearly 40 percent so far this year. Conoco-Phillips has made a record $1.62 billion in profit in just the first three months of 2004. It's a great time to be pumping crude oil (although gas prices also reflect the cost of refining the oil, distribution, marketing, taxes and retail markup).


Public Citizen, Ralph Nader's consumer advocacy group, is calling for an investigation into non-competitive practices among the nation's refineries, which the group views as behaving as a kind of monopoly. And just this week, 11 Democratic governors, including Gary Locke, called upon the president to instruct the Department of Energy to investigate the higher prices. The letter expresses frustration over the appearance that high prices at the pump are being transfered directly into the profit columns of oil companies and refinery operators.


Leeb, however, thinks the situation is too volatile for anyone to master.


"Look, executives are not angels, they're trying to maximize their stockholders' returns. But oil companies aren't causing this," Leeb says. "This is well beyond their control, and they would rather have it at $30 [a barrel] -- $41 is closer to a recession, and that's not good for anyone."


Leeb adds that short-term fixes now in the works could actually result in lower prices over the summer. Most experts believe the national average price will hover around $1.90 a gallon during the summer, which would translate to around $2 in the Inland Northwest. OPEC will meet this week in Amsterdam, and that group is expected to modestly increase production -- although the only country that can pump very much more oil right now is Saudi Arabia.


Such a move will likely help bring prices down, but Leeb says it's just a temporary solution.


"The bottom line is, $5-a-gallon is in your future -- it really is," Leeb says. "We just have to get to a point where this is painful and visible and starts to affect all our lives. Then we'll have to take it very seriously."





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Publication date: 05/20/04