Phil Biggs covers the automotive industry for NewsTalk 1340 WJRW
March 16, 2012 – 2:30 pm ET
GRAND RAPIDS, Mich. – Making weekly drives to the east side of the state, I cannot help but be keenly aware of rising gas prices. We all felt a harsh “shock at the pump” in 2011, with even greater increases the past several months. So what is really causing this phenomenon? Let’s confirm or debunk some urban myths…
America no longer operates in an isolated oil “bubble.” True. Addressing supply and demand by region of the world is the old paradigm. The BRIC countries (Brazil, Russia, India, China) have an exponential impact on prices due to significantly higher consumption rates. As the #2 consumer in the global oil market behind China, the U.S. now meets its petroleum needs in a global setting, and must compete for its share among these high-usage countries.
In a global market there’s not much the President can do to affect gas prices. False. While the President cannot directly control worldwide oil pricing, he can use his position to influence both current and future markets here in the U.S. We cannot domestically produce our way to lower gas prices in a mere six months but, over the course of a presidential term, we have the resources here in the U.S. to impact supply and lower overall cost. What’s really needed from Washington is a sustainable energy policy, not tilting at windmills.
The American oil companies make obscene profits. True and false. The oil companies themselves are making huge profits. But, downline in the supply chain, there are now quite a number of U.S. refineries becoming unprofitable or that have even closed their doors. Sunoco, for example, has a huge refinery outside of Philadelphia that is teetering on the brink. According to www.npr.org “The shuttered refineries were not retrofitted to meet the requirements for removing sulfur from high-sulfur crude. As supplies of usable, ‘refinable’ low-sulfur crude are contracted and become more expensive, (some refineries) became money losers.” From an efficient market standpoint, we need to improve our refinery infrastructure, match it to overall capacity, and thus bolster domestic supply to reduce our price at the pump.
With the advent of alternative energy, there’s no need to increase American oil supply. False. According to the DOE, the U.S. consumes over 180 million gallons a day, and our nearly unquenchable thirst for gasoline shows no sign of abating soon. And, given the rising instability in the Middle East and Iran’s threats of closing the Straits of Hormuz, it is in our economic and political interests to reduce our dependency on supply from that region of the world. Meanwhile, the technical, business and systemic adoption of alternative energy sources simply cannot be integrated into American life as rapidly as some might like. And so we must accelerate our domestic oil supplies now as a bridge to the alternative energy options coming later this decade.
Vehicle sales are expected to increase despite rising gas prices. Somewhat true. North American volume is projected to reach 13.5 million units in 2012, and 14.5 million in 2013, for a gain of 7.5%. But much of this increase is based on at least sustaining flat economic growth, with few negative contingencies factored in. If any unexpected socio-political events occur i.e. further bankruptcies in Europe or a continued debt ceiling crisis, all bets for positive sales gain could be blunted. Auto sales are driven in large part by consumer confidence, which in turn is influenced by housing sector growth. With housing starts down, and consumer confidence still low, growth in auto sales is somewhat uncertain.
Average U.S. Gasoline Prices
|
Year |
Price Per Gallon |
|
1980 |
$1.22 |
|
1985 |
$1.96 |
|
1990 |
$1.22 |
|
1995 |
$1.21 |
|
2000 |
$1.56 |
|
2001 |
$1.53 |
|
2002 |
$1.44 |
|
2003 |
$1.64 |
|
2004 |
$1.92 |
|
2005 |
$2.34 |
|
2006 |
$2.63 |
|
2007 |
$2.85 |
|
2008 |
$3.32 |
|
2009 |
$2.40 |
|
2010 |
$2.67 |
|
2012 |
$3.83 (PY) |
| Source: U.S. Bureau of Labor Statistics Consumer Price Index (CPI). Average Price Data, Gasoline All Types. | |
In the near term pent-up demand alone should drive some marginal growth in auto sales this year, with or without a further spike in gas prices. But if gas prices do continue to rise, as predicted, it will significantly affect our purchasing power…and thus our daily lives. In that regard, paying more at the pump is a political “downer” because most Americans are not shy about voting with their wallets.
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