Tuesday, February 26, 2008

Reaching a Petroleum Ceiling

Steady yourself. The media and experts are predicting a crisis in gas prices.

Gasoline prices, which for months lagged behind the big run-up in the price of oil, are suddenly rising quickly, with some experts saying they could approach $4 a gallon by spring. Diesel is hitting new records daily, and oil settled at a record high of $100.88 a barrel on Tuesday.

The increases could not come at a worse time for the economy. With growth slowing, energy increases that were once easily absorbed by consumers are now more likely to act as a drag on household budgets, leaving people with less money to spend elsewhere. These costs could worsen the nation’s economic woes, piling a fresh energy shock on top of the turmoil in credit and housing.


Mr. Kloza said he expected gasoline to peak around $3.50 to $3.75 a gallon nationwide. Geoff Sundstrom, AAA’s spokesman, echoed that view and added that gas at $4 a gallon is possible this summer. “We’ve gone from a worrying situation for gasoline to one that is quite alarming,” Mr. Sundstrom said.

$3.50 I can see, even $3.75 at the upper end. I doubt we'll see $4, though. Why? Well, because I think both the American and the global economy has absorbed about as much of the run up in energy costs as it can. Energy costs cannot continue in an upward direction indefinitely because there just isn't the ability for people to absorb it beyond a certain point. Sooner rather than later, we are going to begin to see a significant reduction in energy consumption as a result of the high prices. That is going to result in a slow down in consumer demand as people begin to reign in their spending to afford the energy that they do use, and that is going to further reduce demand for petroleum. We could see a protracted economic slow down because of this, and if we do, it isn't going to be pleasant. A protracted economic slow down here is going to have a ripple effect through the rest of the global economy, though, and that is in turn going to result in further reductions in petroleum consumption and demand.

On top of that, continued high petroleum costs at the upper limit of what the economy can afford will encourage further investment in new sources of energy. If we are lucky, the most successful of those sources will not exacerbate inflationary pressures by taking food staples off of people's tables (cough, ethanol, cough). Markets, like nature, like balance. At some point, the global economy will slow or contract to balance energy shortfalls.

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