Not much to grouse about over gasoline price hikes
By Jeff Gelles
INQUIRER STAFF WRITER
If words like OPEC and gas-price increases stir up
uncomfortable memories of the 1970s and early '80s,
fear not.
Yes, gasoline prices have risen 8 or 10 cents in the last
few weeks. And yes, they could easily go up that much
again now that OPEC has announced production cutbacks.
But gasoline prices are starting from a point that is so low that the
Department of Energy can't point to a time when they were lower in
inflation-adjusted terms -- certainly in the last 50 years and quite possibly
since 1919.
In fact, economists who watch the oil industry say that the Organization of
Petroleum Exporting Countries -- the bogeyman of the 1970s oil shocks and
a contributor to the double-digit inflation that followed -- may have done
the United States a favor this time around, by helping domestic oil
producers.
"With the prices we had in January and in the first half of February, the
industry was threatened if it had to continue at that price level for another
year or two," said John H. Lichtblau, the economist who heads the
Petroleum Industry Research Foundation, a nonprofit think tank based in
New York and funded by oil companies. "So this rescues the domestic oil
industry."
This winter's prices dropped low enough to warm the heart of any owner of
a gas-guzzling sport-utility vehicle.
For last year as a whole, the average U.S. price for a gallon of regular,
self-service gasoline was about $1.12, according to the federal Energy
Information Administration. For December, the average price was less than
99 cents, and by Feb. 22 it had dropped to less than 91 cents. At midwinter,
drivers in the Philadelphia area were often paying closer to 80 cents a
gallon, prices long unheard of even without taking inflation into account.
Those kinds of starting prices will inevitably mute the effect on consumers
of OPEC's action, economists said.
Consumers "are certainly going to notice it a little bit, but it's certainly not
going to be uncomfortable," said G. Daniel Butler, a world oil-market
analyst at the Energy Information Administration.
Exactly how much prices will rise is impossible to say. The retail price of
a commodity such as gasoline is dependent on a multitude of factors, as
disparate as the Asian recessions, the East Coast's mild winter, and
seasonal demand. Prices almost always rise during the spring and summer
heavy-travel seasons, for instance.
On Tuesday, OPEC members agreed in Vienna, Austria, with four
nonmembers to jointly decrease crude oil output by about 2 million barrels
a day, Lichtblau said. That amounts to about 3 percent of total world
demand of about 74 million barrels a day, he said.
Although OPEC has tried unsuccessfully in the past to impose cuts in
supplies, Lichtblau and others cite the role of Saudi Arabia as evidence that
these cuts are more likely to succeed, at least for the time being. Lichtblau
said the Saudis "were willing to go below 8 million barrels a day for the
first time," cutting their daily crude-oil output by 585,000 barrels, or about
25 million gallons a day.
Recent price trends illustrate their reasons for concern.
Last year, the average cost to a refiner of a barrel, or 42 gallons, of oil was
$12.57, down 34 percent from the year before. By January, though, the price
had dropped even further, to an average of less than $10.
Prices rebounded after OPEC made its intentions clear on the eve of the
Vienna meeting. This week they are back in the $14 to $15 range, Lichtblau
said, and some analysts predict prices in the $16 to $18 range by this
summer.
Consumers need not fear similar percentage increases at the pump,
however. Crude-oil prices represent only a portion of the cost of refined
petroleum products. Passed on completely to consumers, Lichtblau said, a
$1 increase in the price of a barrel of crude would mean a price increase of
about 2.5 cents per gallon of gas.
$1 divided by 42 gallons equals $0.02381 per gallon.
At D&J Amoco, at Fourth Street and Oregon Avenue in South Philadelphia,
some of the crude-oil price increase had already been passed along --
standard practice, industry analysts say, based on how much it will cost to
replace oil already in production.
"We went up about 7 or 8 cents over the past two weeks," said Michael
Smyth, son of the station's owner. Smyth said the price increases had been
dictated by Amoco, on a gradual basis, climbing no more than a penny or
two a day. Yesterday's price for regular: 99.9 cents a gallon.
Smyth said customers had not yet complained, perhaps because prices are
so low compared with the past. But he expects to hear something if prices
continue to climb.
"People complain when the price goes up. They never say anything when
it's low," Smyth said.
Although there is some fear that rising oil prices will lead to higher
inflation, Lichtblau says that such an effect should be small, and that it
disappears when looked at in a larger context.
"Consumers may have saved as much as $40 billion in 1998 because of low
oil prices, compared to the previous year," Lichtblau said.
Economists say a bigger problem would be price volatility -- repeated and
continual changes, up or down, that would make it harder for businesses or
consumers to make decisions, about building plants or buying vehicles that
get poor gas mileage.
Butler, the Energy Information Administration economist, said there was
little reason to fear such volatility, given how much the international oil
market has changed since the 1970s.
Despite OPEC's decision to cut production, and despite its agreement with
four non-OPEC producers -- Mexico, Russia, Norway and Oman -- Butler
said higher prices would likely result in supply increases from other
sources, especially off-shore production off the West African coast, in the
South China Sea, and in the Gulf of Mexico.
"If prices go up a few dollars a barrel, you're going to get a lot of the
non-OPEC supply rekindling after lying dormant because of low prices,"
Butler said. Because of low prices, "exploration has still been going on, but
development in those areas has been put on hold."
My comment: once an offshore oil rig has been put into place and is operating, enough capital has been invested that will make it an unlikely candidate to be switched on and off according to the latest oil price swings. Those things aren't stripper wells. On the other hand, how much to stripper wells contribute to world oil supply?
Butler said even the worst-case scenario wouldn't be too bad: Prices would
oscillate for half a dozen years, and then come down again because of new
supply sources.
"That will pretty much thwart OPEC's plans," he said.
New field developments do not happen overnight. Decision makers must decide whether prices will stay up or not before going ahead with development plans. With any luck, the economies of Asia will be recovering by the time new developments are producing.
phillynews.com
Charles |
