On The Economy -- Energy Prices Will Rise

Dec. 21, 2004
But the inevitable won't come overnight.

Iraq probably wouldn't be at the top of the list of vacation spots for most Americans this summer. But it does have one advantage. Gasoline is only 5 cents (U.S.) a gallon. How can gasoline be that cheap? The cost of lifting oil from the sands of the Arabian peninsula is about $1 a barrel, or about 2.5 cents per gallon. The cost of refining that oil, if you don't care about pollution or worker safety, is another 2.5 cents a gallon. Even at oil prices of $42 a barrel, which is slightly higher than the recent peak level, the cost is only $1 a gallon. The other $1.10 or $1.20 a gallon you pay in the U.S. stems from higher refining costs for various types of "cleaner" gas, transportation and delivery costs, wholesale and retail margins, and federal, state and local taxes -- costs that will continue to rise no matter what happens to the price of crude oil in the future. Even with the terrorist premium built into crude oil prices, petroleum is currently by far the cheapest source of energy. Of course there are alternatives, including coal, another non-renewable resource. But the problem with "ecologically friendly" sources of energy such as biomass, tar sands, wind power, water temperature differentials and solar power is they cost two to three times the price of crude oil, even at today's inflated level. I would like to propose an experiment for the eco-freaks. Every city would be required to have at least one set of pumps, side by side, with gasoline from hydrocarbons at $2 a gallon and gasoline from the ecologically friendly sources at $4 per gallon. Let those who want to save the planet buy the $4 per variety. Let's see how much is sold. However, to return to my main point, if you think the price of crude oil is expensive now -- and it is almost bound to come down over the next few months -- look ahead several decades. Eventually the world will run out of oil. That doesn't mean we will all freeze to death in the dark. It simply means that we will pay a lot more for energy. When oil prices rose to $35 a barrel in 1981, it was calculated that the crossover point at which alternative energy sources would begin to make serious sense was about $40 a barrel. That's one of the major reasons the Organization of Petroleum Exporting Countries (OPEC) decided not to push prices any higher. Today, that crossover price may have risen to $50 or even $60 a barrel. And it will probably rise even more in the future. After the current oil price bubble disappears, we can reasonably expect the inflation-adjusted price of crude oil to rise about 3% per year as a result of increased costs of recovery. No one knows for sure when oil will start to decline in importance, but a reasonable guess would be at least 50, and quite probably 100, years. But when it does happen, the recent political power of OPEC will completely disappear. Terrorist attacks also will end, since oil billionaires will no longer fund them. Some people think we could cut the monetary heart out of Middle East terrorism a lot sooner by taxing gasoline to European levels -- more or less $3 a gallon -- and using the funds to subsidize research of alternative energy sources and more fuel-efficient vehicles and structures. But I'm a realist, so I know this won't happen. We'll have to wait another century or so for the desired result. Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

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