Don't Fret About Gas, Worry About Energy
By Allan Sloan
Tuesday, May 18, 2004; Page E03
It's easy to see why the price of gasoline is so upsetting to so many people. Gas prices are the one economic indicator you see all the time, prominently posted on big signs -- and the prices are at record levels, seemingly rising by the hour. That has created a new pastime: driving around until you hit the big score, saving a nickel a gallon.
Is this a good use of your time? Not really, once you calculate how long it takes to drive around looking for a bargain and how much gas you burn doing it. If you're already at the financial brink, higher gas prices might push you over -- but for most people, they ought not be that big a deal.
Don't believe me? Here are the numbers. Gas prices averaged $1.94 a gallon at the pump last week, according to the Department of Energy, up 45 cents from a year ago. The average vehicle uses 550 gallons of gas annually. Do the math, and at $1.94, it costs around $1,070 a year to fuel an average vehicle, up from $820. The difference: less than $25 a month. Almost a rounding error in the overall cost of owning a car, which Edmunds.com, an auto Web site, puts at $725 a month (not counting fuel) for the first five years. Forgo the Big Gulp, hot dog and chips that you buy along with your fill-up, and you'll be ahead of the game.
If you're going to worry about energy, worry about the right thing: the way energy prices will slow down the economy if they stay at current levels. "Higher energy costs flow into every nook and cranny of the economy," says Daniel Yergin, chairman of Cambridge Energy Research Associates. Each dollar-a-barrel oil price increase acts like a $20 million-a-day tax -- $7.3 billion a year -- on the rest of the economy. And oil's not all. You also have to include natural gas, which is also in short supply. Add $13 million a day of higher natural gas prices for each buck-a-barrel for oil. With oil up $12 over the past year, the total levy runs more than $100 billion annually. Even in an $11 trillion economy, that stings.
Unlike previous price spikes, which were caused by supply shortages, the current jump is caused largely by higher demand as the U.S. economy recovers, China surges and the rest of the world's fortunes improve. That's the bad news part of the good economic news.
But while supply and demand drive prices in the long term, in the short term prices are heavily influenced by financial players, such as traders on the New York Mercantile Exchange. Yergin estimates that the combination of anxiety about the Middle East and financial players has added $6 to $8 a barrel to oil prices, which closed at $41.55 a barrel yesterday on the New York Merc. If we could get rid of the risk-financial speculation premium, we could see oil prices fall to the low 30s like a shot. That would be a nice financial tonic for everyone except energy producers.
Maybe we need some out-of-the-box thinking to dull this price spike on which the economy threatens to become impaled. Sure, there's a long-term energy problem, requiring that we use less energy, add to the supply or both. But those things would take years to have an impact. For a quick fix, President Bush could use the Strategic Petroleum Reserve to push prices down. The law calls for the reserve to be tapped only when supplies are disrupted, but there's plenty of wiggle room to sell some of its oil.
It would be a smart thing to do, because the $41.55 price for oil today is much higher than the $35.50 it costs for a barrel to be delivered next year. This disparity inspired Loews chief executive Jim Tisch, whose company has extensive energy holdings and plays financial markets like a violin, to propose a trade. Let's sell oil out of the reserve, he says -- not for money, but for oil to be delivered next year. We could get seven barrels next year for six today. We're now buying 160,000 barrels a day for the reserve, which has 660 million barrels. But by trading rather than buying, we'd save taxpayer dollars, reduce the demand that's driving up prices today, and spook the speculators. I love it.
Bush, alas, doesn't. "The president believes that the Strategic Petroleum Reserve should be used only in the event of an emergency, not to manipulate prices," said White House spokesman Trent Duffy. It should be noted that Bush excoriated Bill Clinton for using the reserve to drive down heating oil prices in 2000. Sure, Clinton acted out of political motivations to help Al Gore -- but that doesn't make what he did economically unsound.
But even if you insist on thinking inside the box, just remember that although the big picture is well worth your worry, don't obsess over your gas bill. At current prices, conserving energy is important -- even mental energy.
Sloan is Newsweek's Wall Street editor. His e-mail address is email@example.com.
© 2004 The Washington Post Company
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