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Up, Up, and Away: The Ballad of Rising Gas Prices

When oil prices soar, Americans gasp and groan at the pump. But it is not just personal transportation that is affected -- expensive oil raises the cost of production and shipping for manufacturers, causing them to raise prices and lay off workers.

This tendency, of course, negatively affects the economy. A now-famous study conducted by James Hamilton in the early 1980’s concludes that U.S. economic recessions are almost always preceded by oil crises. High gas prices then are a bright red flag. It will be important for U.S. leaders to control oil costs to avoid economic decline.

How drivers are responding to higher gas prices

Consumers compensate for pricey oil by spending less money on nonessentials like vacations, movies, clothing, and cosmetics, causing these industries to suffer. A recent Harris poll found that 65 percent of adults interviewed are cutting back on dining out in order to pay for gas. 30 percent have stopped buying videos and music, 28 percent are curbing their charitable contributions, and 15 percent are limiting or stopping cell phone use.

Many consumers have no choice but to shift their budgets, since drivers are paying an average of $90 more each month than they were in the spring of 2003. The Harris poll also revealed that the high prices are causing consumers to rethink their vehicles: 60 percent of adults who plan to buy a new car or truck in the next two years said that they will buy a more efficient one, and there is heightened interest in hybrids.

Drivers were also asked whom they blame for pricey fuel. 37 percent said foreign oil producers, 35 percent said oil companies, and 23 percent accuse the U.S. government.

What are the reasons for the high cost of oil? There are many contributing factors, including the Organization of Petroleum Exporting Countries’ (OPEC) management of the oil market, the rising demand for oil, international and domestic politics, and new environmental regulations.

OPEC and the oil market

OPEC, which controls about half of the world’s crude oil exports, has been doing everything it can to keep oil prices from crashing as they did in 1998 and 1999. One of the group’s strategies is to prevent the accumulation of oil reserves or "stock building," because when there is a large stock of oil and seasonally low demand, prices plummet.

Supply

When refineries have little to no oil stock, they have difficulty meeting high demand when it arises. In other words, OPEC’s rules have left refineries, especially those in the U.S., with a thin safety net; so when supply is disrupted, refineries experience a shortage. And supply was interrupted in 2003-04. According to The New York Times, the war in Iraq, a general strike in Venezuela, and ethnic unrest in Nigeria cut into oil supplies.

The lack of oil stock makes price spikes more likely, creating a tumultuous oil market. In turn, the bullish market encourages countries to store oil, a tactic that zaps even more oil supplies.

Demand

As oil supply is wavering, the demand is rising. China’s economic boom means its oil demand will continue to rise for the next two to three years, and the incline will be steep. The International Energy Agency predicts that China’s oil demand will go up 20 percent in 2004, rising above the 11 percent increase in 2003.

The United States is demanding more oil too, due to the recent economic turnaround. U.S. economic growth tends to increase oil demand sharply, since the U.S. consumes one-fourth of all world oil.

Politics

The instability in the Middle East and Venezuela has contributed to the rise in oil prices as well. According to The New York Times, oil traders fear that Islamic militants will attack the oil infrastructure in Saudi Arabia and Iraq. Venezuela, a big U.S. supplier, continues to be politically unstable, as does Nigeria, another OPEC member.

Presidential hopeful John Kerry blames President Bush for further destabilizing the Middle East with bad foreign policy. In response, the Bush administration reproaches Kerry for opposing legislation that Bush claims would decrease dependence on foreign oil. Kerry is against this legislation because he does not support drilling in the Arctic National Wildlife Refuge. Bush hopes to calm the oil crisis by tapping into domestic sources of oil, while Kerry wants to use oil in the Strategic Petroleum Reserve to increase supply and dampen prices.

The role of the Saudis, who from time to time promise American administrations to supply more oil (in spite of their membership in OPEC), is up for discussion again. It is important for us to remember that if Americans ever decide to conserve oil, use other energy sources, and drive different vehicles, the Saudis would be in considerable financial and political trouble.

The European Union, which is also experiencing oil shortages, wants to increase oil supply as well and plans to convince OPEC to increase production. The EU’s energy commissioner Loyola de Palacio contends that there is no real shortage, but rather the perception of a shortage or a "speculative bubble" created by OPEC policies.

Environmental Regulations

The Clean Air Act requires new oil refineries as well as those that expand or update their facilities to install costly pollution control devices. The added expense pushes up the price of making fuel.

In addition, different states demand different gasoline blends, so it is harder to share supplies among states, adding to the cost.

How are oil prices affecting you? Clearly, the factors behind higher oil prices are numerous, but the effect is clear to consumers. Motorists and manufacturers feel the squeeze and alter their budgets to offset the cost. This behavior contributes to a weaker overall economy.

Discuss your opinions on oil prices with other WomenMatter readers in one of our online forums. Then contact your representatives to let them know what you think. You can also register for an e alert, register to vote, and send a contribution to the candidate and party that represent your philosophy of what government ought to do.

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Article Posted on: 5/31/2004

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