Monday, January 30, 2006

Confirmed: Oil prices still too low 

For years now the eastern half of Caracas has all been in a huff that oil prices are too high (yes, these are people in an oil exporting country saying this) and that this will push the world into recession, or alternative fuels to be developed, or simply price oil out of the energy marketplace. Of course, anyone who actually observed consumer behavior in energy consuming countries knew this was absurd. People may have griped about high energy costs but they have continued to act as if it were cheap. Today we get further confirmation of this as Americans aren't about to give up on gas guzzlers yet:

The consensus was sacrifice, the need for Americans to accept that sharing bounty and limiting resource consumption will be necessary parts of their future, if they want to live in peace.

The reality was something different, highlighted by panel discussions, news conferences and automotive executive interviews held in conjunction with the 64th annual staging of the Washington Auto Show, which ends tonight at the Washington Convention Center.

To wit: Not many Americans are willing to sacrifice anything that will in any way lead to their immediate discomfort or inconvenience or upset their sense of entitlement to the better life, especially in the matter of personal transportation.


You would think that with bullets flying, bombs exploding and people on all sides dying in resource wars overseas that fuel conservation would be uppermost in the minds of most Americans shopping for new vehicles. After all, it's America that's pouring huge amounts of blood and tax dollars into those global conflicts.

At the very least, you'd be tempted to wager that basic selfishness, reflected in concern about rising gasoline pump prices at home, would spark a rush toward more fuel-efficient cars and trucks. You'd be wrong on all counts.


What about fuel economy? It finished dead last in the survey, with only 3 percent -- repeat 3 percent -- of those polled listing it as their "most important" consideration.

If you think that's bad, 11 percent of those polled listed fuel economy as their "least important" concern, along with "least important" ratings for insurance costs (40 percent) and vehicle color (28 percent).

So oil is at $60 a barrel and Americans aren't batting an eye lid. Of course, there is a very logical reason for that. Despite high nominal prices gasoline is still inexpensive in real terms and even cheaper when compared to other things they purchase. The average American spends pays more for a gallon of bottled water than they do for a gallon of gasoline.

There was a little tid bit in the Wall Street Journal today that also helped explain why oil is still viewed as cheap:

...at $70 oil expenditure still makes up only about 4% of global gross domestic product, compared to 7% during the oil crises of the 1970s and 1980s. At $120, oil expenditures would make up nearly 8% of global GDP.

So due to growing economies and rising incomes oil is costing the world barely half of what it did in the 1970s. Thats why the price increases have been easily absorbed by the worlds economies. And that is why Iran and Venezuela are right to tell OPEC it should be cutting back on production to at a minimum keep prices where they are, if not nudge them even a little higher.


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