Drp) What Is Wrong With

¶ … Drp) What is wrong with Gas Prices? I am afraid, not many Americans will agree with my point-of-view, when I submit that what is wrong with gas prices is that we have become used to low gas prices. I believe that higher energy prices will benefit United States and our planet in many ways, and I for one would be willing to accept the sharp shock that high energy prices will deal to the gas guzzling ways we, the Americans have taken far granted.

(Ferguson, 2006) in an article in the Telegraph joked that if gasoline reached $3 per gallon in United Kingdom, people would be queuing from Beaconsfield to Brighton to buy it. When the price of gasoline hit $3 per gallon in parts of United States, the price in England was 98 pence per liter or $6.63 per gallon. The truth is that even if the gasoline prices had kept with the inflation over the years, the real price now would be more like $4 per gallon. In 1980, the gasoline was priced at around $1.25 per gallon.

The price of a typical new car was around $8,000 and the price of a new house was around $80,000. The prices of these items and others are typically four times these figures now. If gasoline prices had just kept with the inflation we would be paying nearly $4 a gallon now. In October 2004, when crude oil reached $55 per barrel, Mr.

Greenspan, the then Chairman of Federal Reserve reminded us that that even at that level, "crude oil prices are still about 40% below the all-time highs - in inflation-adjusted terms - of February 1981" [Crutsinger, 2004] Analysts even argue that high oil prices are good, on the principle that they send a signal to producers and consumers that it is time to seek new sources of energy. Until 1973 energy crisis, the oil was dirt cheap. U.S. influence in the Middle East made sure that prices stayed at a low level.

In those days Iran was an American ally and pro-U.S. Saudi Arabia which had a capacity to produce 11 million barrels a day was used to regulate the supply and hence the prices in the international market. It made us used to cheap supply of oil on one hand but on the deficit side it made oil exploration uneconomic. Arrival of OPEC on the scene and political upheaval in Iran disrupted the oil prices for a while but $9 barrel crude oil supply resulted in many a new finds.

North Sea Oil was tapped after the 1973 crisis as the cost of extracting oil from deep sea was around $8 a barrel and $9 per barrel made the extraction economically viable. Of course soon after wards prices rose even higher and North Sea Oil became positively profitable for the region. The first lesson we learn from this is that reasonable price of oil will help exploration and will make more oil available to the world.

United States with 5% of the population of the world has been consuming 30% of fossil fuel resources of the world. The industrial progress in the newly developing countries such as China, India and South East Asia has created huge oil demand in those countries. These developing countries would be competing for a limited resource with the developed countries and the oil prices would continue to show an upward trend in the foreseeable future. We have to appreciate that oil is a finite resource.

The doomsday forecasters have been predicting that oil will run out since the mid 1960s. An ESSO report, Report for the UN Conference on Human Environment, UK Department of Energy, Shell and World Bank claimed in early 1970s that "Oil will become increasingly scarce from the year 2000" and that it was "likely that peak production will have been reached by the year 2000" [Production and the Hubbert Curve, 2006].

The forecasts were based on incorrect information and those remembering the forecasts but unaware of the difference between oil peaking and oil exhaustion, assumed that all the predictions were that oil would run out by 2000. Oil did not run out in 2000, neither did it peak that year. The reserves have continued to grow but some of this increase is not due to new discoveries. Reserves of oil are the quantities that can be economically recovered.

When the price of oil was $6-7 per barrel, it was uneconomic to extract North Sea Oil, when the price of oil grew to beyond $9 per barrel that oil became viable. These figures seem laughable now, but just like North Sea Oil extraction, continued increase in oil prices have made more oil available to the world and there is every reason to believe that higher oil prices will allow us to go deeper into the ocean and develop technologies to recover oil from vast under sea resources not yet explored.

Before the War-on-Iraq crude oil prices hovered around $22-25 per barrel. In the aftermath of Iraq war prices rose to around $40-50 per barrel. The present Iran nuclear issue, belligerent postures by Central and South American oil producing countries and no end in sight to Iraq conflict have sent the price to $70+ per barrel. Is this a boon or a bust for United States economy? My thesis is that higher oil prices are in the interest of United States.

Higher oil prices are here to stay and even if the present political turmoil comes to an end, the oil prices will only show a temporary drop but will recover soon due to high oil demand in the developing countries. It is in United States interest to begin to adapt to the new realities.

I believe that higher oil prices will be good for United States and the world, as this will force us to improve energy utilization efficiency, reduce global warming emissions and perhaps make implementation of Kyoto Protocol a viable option. Reducing the energy prices for political reasons requires removal of taxes on petroleum products but this would make it cheaper for the individuals and not for the government or oil companies. We will use it more inefficiently and the oil reserves would decline more rapidly.

As oil becomes more and more expensive, there would be no more taxes to cut and as the governments have to get their revenue from somewhere, people would not actually benefit from cut in petroleum taxes as they would be paying taxes on something else. Reducing taxes to reduce gasoline prices is no solution at all. With this introduction we can now proceed to the objective of this study and that is to establish that higher energy prices are not necessarily bad for United States.

In order to do that we need to: Establish the impact of international oil prices on the price at the gasoline pump Analyze the negative effects of higher fuel prices on the economy Assess possible political impact of higher energy prices Discuss the potential benefits of higher energy prices Evaluate the overall impact of higher fuel efficiency Review the environmental impact and effect on Global Warming Judge public opinion on continuing with higher energy prices thorough a representative survey Crude Oil Prices and its Impact on Gasoline Prices We need to have someone to blame for higher energy prices and the political turmoil in the Middle East is a good scapegoat.

Our European allies and generally the world would blames this on incorrect U.S. policy as war-in-Iraq has gone terribly wrong and search for secure oil supplies has resulted in what seems to be a prolonged insecurity. The present oil prices of $70-73 per barrel are not necessarily the highest expected. The oil analysts were forecasting crude oil to reach $100 per barrel if the demand continues to grow at the present level. The Energy Information Administration [EIA, 2004] publishes a Petroleum Supply Annual every year.

The data includes the average distribution of various components in gasoline costs. The latest available data at present is for 2004 which shows that at an average price of $37 per barrel in 2004, the crude oil accounted for 47% of the fuel price at the pump. We estimate that an average crude oil price of $74 per barrel would make the contribution of crude oil price to gasoline price close to 60%. While remaining 40% would be accounted by the distribution and marketing, refining costs and profits and Federal and State Taxes.

This is a large change. A sustained price increase of this magnitude would make people more conscious of how to use their SUVs and other Gas Guzzlers. Break up of Gasoline price [Reference: EIA, 2004] At present just the real cost, taxes and seasonal fluctuations are being passed on to the consumer. The taxes are so low that we do not have to pay anywhere near the prices being paid by our European friends.

A price differential of $6.60 per gallon in UK and around $3 per gallon in USA shows the difference in taxation on gasoline in the two countries. An American who spent sometime in Germany recounted his experience [Will Higher Gasoline Prices Inspire Lifestyle Changes, 2001] of energy prices in that country, "When I lived in Germany, the price of gasoline went from the equivalent of $2.50 per gallon to $3.25 per gallon over night. The Bundesregierung had added another $0.75/gallon gas tax, in addition to the existing $2.00 per gallon gas tax.

(That's right: $2.75 out of every $3.25 per gallon was Federal taxes.)," He remembered the effect on prices on his use of transport, "I used the public transport system, easily the best in the world." This is the direction our country will have to go too.

Do we allow this country to be totally dependent on imported oil? Should we keep gasoline prices low to prevent development of alternatives or take necessary steps now to create a change in the present Gas Guzzling life style? The powerful petroleum lobby is preventing development of alcohol-based fuels. The present vehicles can use gasoline mixed with 10% alcohol without any modifications and without any loss of vehicle performance.

The decision has to be made by people who are supported by the petroleum giants and it is unlikely that any decision will be made to reduce our dependence on gasoline until we can muscle our way into tapping cheap oil. Higher oil prices will prevent mindless use of energy resources.

Even a $3.25 per gallon price will cause reduction in gasoline use, additional taxation to bring the price closer to European prices will cause a political upheaval but is bound to alter the present life style and very soon we will be exploring more efficient use of gasoline usage and alternates to reduce fuel consumption and the world will eventually be a better place due to these measures.

Negative effects of higher fuel prices on the economy It would be absolutely incorrect to suggest that higher energy prices will not have an initial negative effect. Indeed it will have a severe effect especially because the prices in United States have been kept too low for a long time.

As energy prices have fluctuated up and down over the last two years, the consumers tend to do nothing to counter the effect of high oil prices; they believe the price increase to be temporary and continue to buy inefficient cars and other energy consuming items. They hope that the prices will drop as soon as we can resolve the Iraq issue or Katrina crisis and have to suffer in the process.

In many countries with high energy taxes, short-term fluctuations are absorbed by varying the taxes but the high energy prices such as those in Europe make the people change their energy use habits benefiting them and the country. Market prices for both natural gas and crude oil are currently hovering near historical highs. Whether prices are sustainable at these levels remains uncertain. Energy price forecasts by Global Insight and the U.S.

Department of Energy suggest that we are entering an extended period of high crude oil and natural gas prices. Greenspan forecasted in 2004, "We and the rest of the world doubtless will have to live with the uncertainties of the oil markets for some time to come" [Crutsinger, 2004]. Isn't it time that we accepted that higher oil prices are here to stay and started to act to minimize the negative impact of higher energy prices.

Higher energy costs have a negative impact on the purchasing power of individuals, heavy energy using industries and firms suffer a lot, causing job losses, agricultural sector being a large consumer of energy also feels a major impact. Fertilizers are made from natural gas and an increase in energy prices increases the cost of agricultural inputs. Higher Energy prices will have an initial impact of reducing net disposable income.

The consumer items oriented industries such as electronics, automotive and travel industry will be most adversely affected as discretionary spending will be reduced. Industry dependant on oil such as power generation, transport services and agriculture will also feel the negative impact.

Industries under strong competition with others may not be able to absorb the shock of higher fuel costs and are likely to suffer as a result of higher energy prices [Fenton, 2004] For United States, the impact of increases in energy prices is different for energy producing and non-energy producing states. Oil rich states such as Oklahoma and Texas have fewer worries as higher prices has a positive impact too, oil and gas related firms generate more revenue resulting in increased employment and providing stimulus to the overall economy.

The impact on non-energy producing states is negative without a doubt [Snead & Martinez, 2004]. What we have to appreciate is that higher energy prices will be an initial shock. The energy prices of 1970s helped us become more energy efficient. A drop in oil prices in the real terms made energy efficiency improvement of low significance and economically less attractive. Energy prices in the countries of OECD are much higher than U.S. prices, but this has not reduced their competitiveness in a global market [IEA, 2004].

There is no reason that after initial adjustment United States will also adjust to higher oil prices. The government policies need to send a clear signal that energy prices will not go down, only then energy efficiency measures, alternate fuels, and energy efficient appliances will have a chance to develop to eliminate the impact of higher energy prices. In absence of such policies higher energy prices will not result in these benefits and the negative effects will impede the economic development.

Political impact of higher energy prices If the present energy pricing policy is continued, there will be no political impact. The government is simply passing on the increased price to the consumers. Seasonal variations and impact of natural disasters such as Katrina are also tolerated and general public moans a little but hopes that the prices will go down soon and continues with life as normal. As the price rise is taken as a temporary spike nothing is done to counter the impact of higher prices.

What United States needs to do is to consider increasing the price to a higher value by imposing taxes. Ensuring that the higher energy prices are retained even if the energy price in international market falls involves a huge political risk. This is a policy no politician will like to advocate.

When Al Gore presented his views on energy policy in his book 'Earth in Balance', the analyst were prepared to predict that "If there is a single issue that should insure the defeat of Al Gore in November, it is the rising cost of gasoline because that cost is directly attributable to the policies he has advocated in his book, Earth in the Balance, and during his career in the Senate and as Vice President" [Caruba, 2000]. Gore lost the election though not necessarily due to his views on energy.

If America is to find solution to its energy problems, the politicians will have to take some painful decisions to allow the country to reduce its oil imports by developing alternate resources.

If we do nothing there is little doubt that gasoline prices will touch $4 per gallon in not too distant future and we will continue to wait for oil prices to drop as soon as the leftist governments in South and Central America change or Iraq becomes stable and remains pro-U.S., we will be wasting precious time and the economy will go into recession.

On the other hand if we can increase the price of gasoline by taxing it further to say $4 per barrel, it will make the public and the new technology developers that they can safely base their costing on the assumption that their will be a demand for alternate technologies and a future drop will not jeopardize their investments in alternate development. The tax collected from additional tax can be used to develop new fuels such as alcohol mixed gasoline or alcohol.

Average price of gasoline in Tennessee today is $3.05 and an Internet advertisement is advertising a SUV that can give 28 miles per gallon. This would not be a sales pitch if gasoline was $1.25 per gallon. Governments both Federal and states have to take politically risky decision of ensuring that energy prices are maintained at a level that encourages efficient utilization of energy, creates an incentive to use public transport and use taxes to provide incentives to build less fuel thirsty means of meeting our needs.

Potential benefits of higher energy prices Higher energy prices may at first glance appear to be a nuisance which have to be tolerated if unavoidable but there are also many advantages of national and public importance in maintaining higher energy prices. Most oil importing countries use high taxes to discourage wastage and minimize imports. Fuel taxes are an important source of funding for national development projects. Third world countries with average income of less than 10% of that in United States often have gasoline prices higher than that in USA.

Countries with domestic natural gas resources but with little or no domestic oil have used taxation to promote use of compressed natural gas as an alternate fuel to reduce dependence on imported oil. Higher energy prices have made public transport popular, for inner city use lighter cars such as 'British Mini' became very popular. Light two wheelers motor-cycles with engine capacity of 50-100 cubic centimeter are very popular in third world country as they have good fuel efficiency of 140 miles per gallon.

Natural ventilation, deciduous tress help cool the houses in tropical summers and roof insulation helps keep the house cool or warm as the case may be. Ceiling fans are preferred over air conditioning where possible to keep reduce energy bills. This type of measures will not even be considered if the energy prices were low.

Yetiv, 2006] favoring high prices of oil argues that President Bush's energy legislation may be a step in right direction but it practically does nothing to alter energy consumption in the transport sector where 70% of oil is used. He argues that higher energy prices may achieve what the 2005 energy legislation fails to achieve. Higher oil prices will encourage development of alternate energy resources, will make more likely that automaker will begin to mass produce energy efficient less costly vehicles and reduce the demand of energy thirsty SUVs and pickup trucks.

Higher oil prices will make hybrid vehicles more popular; car users will be less likely to waste gas and begin to demand energy efficient cars. Higher oil prices will benefit the environment; alternate fuels will reduce carbon emission and reduce global warming. Higher oil prices have also made us aware that we will have to reduce our dependence on imported oil and strive for greater energy independence as advocated in President Bush's recent State of the Union address.

Yetiv, 2006] argues that we should not wait for oil prices to increase but use taxes to alter the oil habit. The income from the taxes can be used to support development of alternate sources, making alcohol powered cars viable and to help support those who are negatively affected by the higher oil prices. Higher Oil prices benefit the U.S. oil exploration companies as they are share holders in the world wide production of oil.

Exxon Mobil and Royal Dutch Shell declared mammoth profits for 2nd quarter 2005 of more than $7 billion and $5 billion, respectively. Smaller Marathon Oil Corporation posted earning growth rates of 91% [Quinn, 2005] Higher oil prices such as the present ones are seen as temporary and while they may generate windfall profits for oil producing countries and companies with oil holdings, they do not result in effort to reduce energy consumption. For efforts in alternate fuel development, efficient technologies etc., the developer need to be sure that the prices will remain high.

In his research [Koetse, 2006] shows that uncertain energy prices have an inhibitory effect on investment in energy saving technologies. In order to implement energy consumption reduction strategies we need to have persistently high energy prices to stimulate development of techniques such as energy saving technologies, alternate fuels and development towards more energy extensive processes. Environmental Impact Our present high energy consuming life style is contributing to environmental pollution. High oil prices will have a major impact on reduction in fuel consumption and development of alternate fuels.

The energy prices will force us to economize on fuel consumption and reduce the environmental impact of burning fossil fuels. Oil accounts for 36% of worldwide fuel consumption. In 2002 nearly 50% of the petroleum products consumed in the world went to the transport sector [Plouchart, 2004]. 75% of the petroleum products consumed in the world are used in OECD countries including United States. We have the largest population to car ratio; 775 vehicles per thousand persons. The United States Bureau of Transportation Statistics produces data relating to the transportation sector.

The data shows that in United States the share of fuel consumption in transportation sector has been increasing continuously. Transport sector accounted for 27.44% energy used in United States. The quantity of motor gasoline was 62% of the petroleum used in transport sector. This huge quantity contributes to pollution on a massive scale. The carbon dioxide produced by motor gasoline in 2003 was equivalent to 311 million metric tons of carbon [Bureau of Transportation Statistics, 2005].

If we could achieve even 10% improvement in energy efficiency through use of lighter cars, it would save million of tons of oil and also reduce the carbon emission by 30 million tons. The 10% target is not just possible it is very realistic and even now a family car is about 25% more fuel efficient than a light truck (a term also applied to SUVs). The federal corporate average fuel economy (CAFE) standards set the fuel economy goals for new passenger cars at 27.5 miles per gallon (mpg).

The regulations do not classify SUVs as cars but as light trucks. The light trucks only have to achieve 20.7 mpg. Even this is taken as an average of all light trucks and some SUVs operate at 12 mpg and can remain on the road legally. Some SUVs like Ford Excursions don't even qualify as light trucks and are not subject to CAFe standard. The oil price rises of 1970s were considered as permanent and not only the public but the governments also acted to improve energy efficiencies.

The period between 1973 to mid 1980s saw huge improvement in energy efficiency of our cars [Heavenrich & Hellman, 2000]. Figure: Automotive Technology & Fuel Economy Trends 1975-2000 [Heavenrich & Hellman, 2000] drop in oil prices in real terms since then removed all interest in buying energy efficient cars. SUVs accounted for only 2% of the cars in 1985 Roberts, 2001, now one in four vehicles sold is an SUV [Naughton, 2001]. The result is that the overall fuel efficiency in the transport sector is actually falling.

The result is that we are not only becoming increasingly dependent on imported oil and have to send our sons and daughters to war to protect our oil, we are also polluting our own atmosphere and causing global warming too. A typical car operating at CAFe standard of 27.5-mile per gallon will discharge roughly 54 tons of carbon dioxide into the atmosphere in its typical life cycle. An SUV will discharge 100 tons of carbon dioxide over the same period [Environmental Double Standards for SUVs, 2001].

The permitted emission rates for sports utility vehicles are less stringent too. SUVs are allowed to emit 30% more carbon monoxide and 75% more nitrogen oxides than passenger cars [Motor Vehicle Facts and Figures, 1997]. Increasing number of SUVs is not only increasing our dependence on imported oils, it is also polluting our atmosphere. Higher oil prices will dissuade people from buying these vehicles. Higher oil prices will change these crazy habits.

The SUV makers like Ford are already under Chapter 11 bankruptcy and switching to energy efficient cars hybrid and passenger cars might make them more viable. We therefore need not be too concerned about the makers of SUVs. Global Warming United States rightfully claims to be the leader of the world. Its energy consumption also entitles for this position. The problem is that being a leader and a major consumer of energy resources also puts an additional responsibility on United States to use the world energy resources responsibly.

American scientists have been studying the impact of fossil fuel combustion on earth atmosphere since the early 1960s. They have reached the conclusion that the carbon dioxide produced by extensive use of fossil fuels is resulting in a rise in global temperature which will alter the weather pattern and melting of ice caps at the poles. The Global Warming, as this phenomenon is now called will have a devastating effect on our planet, many low lying islands and mainland areas will be submerged under the sea.

Global Warming phenomenon was not a ploy invented by the iron curtain countries to stop United States from making progress. United States has been at the forefront of global warming research as most of the research on the subject has been funded by U.S. government. When these results were published, the whole world became concerned and United Nations formed an International Panel on Climate Change (IPCC) in 1988.

United States convinced of the effect of climate change by global warming gases took lead in all of the IPCC meetings and made commitment to reduce emission of global warming. United States was a signatory to the Kyoto Protocol which committed us to cutting down consumption of fossil fuels. The fear that Kyoto Protocol implementation will have a severely negative effect on U.S. economy made us declaring the Kyoto Protocol dead.

The fact is that Kyoto Protocol and global warming are very much alive and whether we like it or not our inefficient ways of consuming energy are adding to the problems for the world, now in terms of higher energy prices and for later when the global warming impact creates problem for the inhabitants of this planet.

Only the time would tell if improving energy efficiency would have been in the interest of United States or the present low energy prices, high fuel consumption is better in the long-term interest of the country. I believe that higher energy prices would have been much better for the long-term interest of our country.

In the time of low energy prices it would have enabled the government to invest in development of alternate energy technologies, helped in increasing expenditure on social sector and cushioned the public from abrupt price increases as we have to face now. I have presented argument that keeping the energy prices at a low level has had a negative effect on our economy.

It has made us wasteful of energy; it has prevented development of systems which could have created less energy thirsty methods of handling our social and work patterns. It has prevented development of alternate fuels, development of new domestic oil resources and left us on the mercy of OPEC and other oil producing countries. While other oil importing countries maintained high taxes on petroleum products to fund imports and other social sector activities, we acted otherwise.

In case of very high international energy prices these countries can reduce the taxes to cushion the impact of high prices on their economies we do not have that opportunity. With this thesis I would like to propose to research the public opinion on increasing the energy prices at a persistently higher level. If the investors know that the prices will remain at a high level they will concentrate on devising systems that reduce the operating costs.

The consumers will also demand energy efficient products as they would know that the prices will not drop even if another twenty refineries are commissioned or if all the political crises are resolved. This would be painful in the.