A blog for better streets and public spaces in Portland, Maine.

Monday, September 14, 2009

The Increasingly Lonely Road

Last summer, when gasoline prices hit $4 a gallon, the driving factors behind the price-spike were supply (the world's oil resources are limited and the remaining oil is increasingly expensive to extract) and demand (on top of growing consumption in the U.S., the economies of China, India, Brazil, and other emerging economies were growing at a breakneck pace, and sucking up an increasing portion of the world's oil supplies).


Then the global recession happened, and oil prices settled down - but still nowhere near the levels where they had been in the 1990s. You might recall that some people blamed "speculators" on last summer's price spike. The recession, I think, proved the falsity of that claim: through the depths of last fall's credit freeze, "speculators" with any cash to spare were few and far between (and its unlikely that the few that remained would have bothered with oil futures). Yet oil prices, adjusted for inflation, still remained much higher than they were in 1998, the peak of the Clinton-era boom.

So where do we stand now, looking toward recovery? Don't look now, but gasoline prices are creeping up towards $3 a gallon again. On the supply side, some new oil discoveries represent the payoff from increased exploration from the days when prices were sky-high. But those new discoveries are still hard to get to, and the oil is going to be expensive to extract.

On the demand side, lots of unemployed people stopped driving and almost everyone resolved to drive less to save money in the United States this past year, and consumption dropped a few percentage points. But while we were taking a breather, emerging Asian economies continued to grow at a breakneck pace - the global credit crisis registered only as a brief dip on their GDP growth charts, and now they're growing as fast as ever.

So where does that leave us? On the supply side, the global "pie" of oil supplies is a little bit larger, provided the customers are willing to pay more for their slices. But on the demand side, countries like China, India, Russia, and Brazil are gobbling up a lot more oil.

So when our economy returns to "normal", and if we go back to the gas pumps to consume as much oil as we did in 2007, we're going to have to pay a lot more for it, because hundreds of millions of people in the developing world are also making bids to buy this limited resource.

More realistically, though, Americans probably aren't going to go back to the gas pumps the way we did in 2007, ever again. We're driving less as we get older, and those of us who still do drive are going to drive for shorter distances in more fuel-efficient vehicles. And prices will remain high, as demand elsewhere in the world gulps up the remaining oil. That's the conclusion of a number of commodities experts and economists summarized in this article from Barron's. An excerpt:

Unfortunately for U.S. drivers, $3 or more might be the new norm...

"It's pretty clear that the 2007 level will be the peak in [domestic] gas consumption for a long time to come, if not forever," says Ed Morse, the former head of commodities research at Lehman Brothers and now a managing director at Louis Capital. Goldman Sachs expects the nation's gasoline demand to fall 0.5% in the second half, tick up 1% in 2010, then remain flat in 2011, as supplies tighten and prices stay high.
This has important implications for state highway agencies, which rely on per-gallon gas taxes for their budgets. If gas consumption is declining or flat, that means there's going to be less money available for highway construction - even as construction costs continue to increase. Raising gas taxes will only serve to depress demand even further, and cause more people to drive less as a way to save money.

States like Maine will increasingly have trouble maintaining existing roads, and building new roads (and increasing our maintenance costs even further) will be out of the question entirely.

That's the fiscal reality. But it's anyone's guess when the alternate-universe space-cadets in Augusta, who are still planning to spend hundreds of millions of dollars on freeway widenings, will get the message.

2 comments:

Gary Higginbottom said...

Good summary -- and good reason to push Maine DOT toward investment in commuter rail to bring people to Portland instead of plugging up I295 and the new Franklin Street. Get a big crowd to attend MDOT's public meeting on the Maine State Rail Plan. The public meeting is Sept. 29, 2009 at USM's Glickman Library, 6 to 8 PM.

Gary Higginbottom
ghiggin2@earthlink.net

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