As a professional energy economist I am obligated to set the record on gas prices straight. This week I’ve heard that President Obama is to blame for higher gasoline prices. I have heard politicians claim they can lower gasoline prices. A noted MSNBC announcer that covers the stock market pronounced that removing oil industry subsidies would raise gasoline prices.
Here’s the economic truth:
TRUTH: Price = Supply and Demand
Gasoline stations adding a mark up to supply costs do NOT set prices. Prices are established by the market dynamic of consumer demand and manufacturing supply. The price of oil is high right now because incremental world demand is growing faster than the marginal capacity for increasing oil supplies.
TRUTH: Gasoline prices will NOT come down
Because it is supply and demand that sets the price of gasoline, the price of gasoline will not fall over the long term. Does anyone really think the price of gasoline will be less in 5 years?
There are two mega-trend reasons why the long term price for gasoline will be higher:
The first is that there are no more “Saudi Arabias.” That means the world no longer has an easy-to-recover, low cost, low risk new pool of oil to harvest. There is still a lot of oil to be recovered but it costs more to do so because of very high risks and costs tied to geopolitical issues and the high potential for causing environmental damage associated with new deposits of oil. The only scenarios where pump prices could fall are a global economic collapse or breakthroughs in biofuel technologies.
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The final pump price truths are:
1) Gasoline is a 20th century solution that is losing its price competitiveness to energy efficiency and cleaner technology solutions.
2) No politician can lower the world price of oil.
3) Oil companies are not creating higher oil prices. Believe me, at today’s prices they are trying as hard as they can to find more oil. And they are very concerned that higher gasoline prices will permanently erode U.S. demand for oil. But oil prices will not fall over the long term because the ability of oil companies to increase supply lags the incremental increases in the world’s consumer demand.
4) High long-term oil and gasoline prices are not a product of speculative trading. Corrupt trading could cause price volatility and spikes. But the underlying cause for higher prices is that incremental demand is growing faster than the marginal capacity of production.
As painful as pump prices are this is great news over the long term for America, the environment and our economy. Price competitive sustainable product solutions are emerging. The ramification of sustainable products gaining price parity is that 85 percent of consumers will buy the more sustainable product vs. the less sustainable product if their prices are equal. Counter-intuitively, today’s higher price for gasoline is accelerating our economy’s potential for implementing sustainable solutions that will create American manufacturing jobs and restore our environment.