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To: Jerry Olson who wrote (55904)	8/15/1999 2:33:00 PM
From: kendall harmon	Read Replies (1) \| Respond to of 120523

Donald Ratajczak says Energy Prices will Continue Rising For the Journal-Constitution Sunday, August 15, 1999 Who would have believed, when the price of a barrel of oil was below the digits of the year of the Norman conquest ($10.66 for the history impaired), that it would be futuristic (above $19.99 per barrel) by the middle of summer? When the oil producers met early in March, there was virtually no storage facility or vessel that was not full of oil or its products. The winter was so mild that the drawdown from the early winter peak was negligible. As a result, Saudi Arabia was suffering serious budgetary problems, as were most of the oil-producing nations that were heavily dependent upon oil revenue to finance their governments. If enough oil producers decided to cut production, the hope was that oil prices would rise by more than output would fall. As a result, oil producers would receive more revenue for producing less product. This is possible in the short run because the demand for oil is price-insensitive. Oil is not normally demanded for itself. Instead, it is used to operate vehicles, run factories, produce heat, and help create chemicals and plastics. When 90 percent of the cost of driving a vehicle a mile is the cost of the car and its financing, even a doubling in oil prices will have only minimal impact on car usage. Of course, when the vehicle is replaced, operating costs may be used in determining what vehicle to buy next. During the high gasoline prices of the 1970s, fuel-efficient cars were the rage. As a result, the oil used per mile fell by nearly two-thirds over the decade. In the 1990s, oil has been so cheap that power vehicles and gas-guzzling sport-utility vehicles have become the rage. Would anyone be surprised to learn that gasoline consumption is up more than 5 percent in the United States this year after growing more than 4 percent last year? My own estimates are that the quantity of oil demanded falls only 2 percent in the short run for every 10 percent increase in the price of oil. Over time, higher prices will lead to more efficient cars, better heating and even relocations to minimize commute times. (Yes, the Atlanta urban sprawl would never have become this bad if the price of oil had been higher.) The long-run price responsiveness is 7 percent reduction in quantity for every 10 percent increase in price. Since March, however, oil prices have doubled. If nothing else had occurred, oil production would have needed to fall 20 percent to achieve that result. In fact, oil production has been reduced only by 7 percent. What else has happened? First, there have been production disruptions. In March and April, refineries in California were closed by fire. Just last week, another fire reduced distribution of oil in the Texas area. The result has been a much faster reduction in oil inventories than expected. Second, hot weather in the Northern Hemisphere has sharply increased the demand for energy. This unexpected weather need requires almost 4 percent more oil production to maintain inventories. As the production was not available, inventories have fallen further. Third, world economic growth has begun to rebound. From an 8 percent decline last year, South Korea has been able to grow almost 7 percent early this year. Similar stories have occurred in Japan, Singapore and other Asian countries. This shift in growth requires another 3 percent increase in oil production. Fourth, the energy efficiency that began in 1974 in the United States no longer is occurring. Two years ago, the energy needed to produce an inflation-adjusted level of gross domestic product did not decline for the first time in a generation. This year, energy use may grow even faster than GDP for the first time since 1973. Such reduced efforts to conserve energy require yet more production. While the total impact of the above conditions is not sufficient to justify a doubling of oil prices, it certainly can preserve oil prices above $18 per barrel. Furthermore, if the winter is harsh, inventories no longer are ample to deal with all eventualities. Thus, some premium will be paid to encourage storage against such a risk. Oil prices will again fall into digits that correspond with history in the next few years. This winter, however, futuristic prices will prevail. For those who want an easier benchmark, be prepared to pay about 35 cents more per gallon for gas than you did a year ago. The economy's cost of energy will be $40 billion higher than a year ago, and that is bound to have some impact upon other forms of consumer spending. Source: infoseek.go.com. Dr. Ratajczak teaches at Georgia State University