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Sierra Daily

Apr 29, 2011

Gas Prices: Worse Than You Think

I was late for work today because I had to drive way out of the way to find the gas station where if you pay cash you can get a gallon of regular for $4.17. Like many others in a similar position, I am very happy to blame it on rapacious oil companies. Now, it turns out, we are not even allowed that simple pleasure. Derek Thompson over at The Atlantic interviewed a lot of energy experts and put together what he calls an "editorial pie chart"--a chart not based on hard data about why the price of oil has increased 30% in five months (because the data doesn't exist), but on the experts' opinion of the importance of each factor: Gas graph                                                                                                                                                  As you can see, speculation is part of the mix, but a pretty small part. Today Washington Post smart guy Ezra Klein follows up with an account that makes you wish it was just speculation. Here he quotes one James Hamilton, an energy economist at UC San Diego: “Speculation is a convenient scapegoat for people who can’t be bothered to look seriously at the numbers.”

Here's the bad news, according to Hamilton. Saudi Arabia is slashing oil production, while Chinese demand is growing rapidly. Despite the $4.17/gallon I paid this morning, demand is not easing up.

“The key question you should be asking is the following,” says Hamilton. “Is the current price too high in the sense that the physical quantity being produced is greater than the physical quantity being consumed? If yes, then where is the difference going, and what mechanism accounts for that?” Left unsaid is the “if no.” But if no, then who is supposed to start using less oil in the coming years, and if the answer is no one, then how, absent recurrent recessions, are we supposed to make what oil we have go around at a price the global economy can handle?

The other day I presented evidence that improving fuel-efficiency of automobiles would lower gas prices more than offshore drilling would. But until we get beyond oil, our wallets and our economy will remain hostage to rising demand for an increasingly rare product.

--Paul Rauber

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