Oil Prices Only Going Up From Here
By George Anderson
If you held out hope that energy prices would be coming down, it’s time to get over that notion.
Guy Caruso, head of the Energy Information Administration, said yesterday that oil prices will remain high ($50 a barrel or higher) because oil producing nations are not investing
in new oil supplies and are unable to keep up with the demand created by nations such as China and the U.S.
As a result, the government expects to see more consumers buying more energy efficient cars and individuals and businesses investing in alternative energy technologies.
Today, reports The Washington Times, the world consumes 87 million barrels of oil a day. Global demand is expected to push that up to more 100 million barrels a day by
2015. Some are now openly questioning whether there are sufficient supplies to meet future demand.
Robert L. Hirsch, an energy consultant with Science Applications International Corp., thinks the situation is already at the critical stage. Mr. Hirsch said the world could reach
its peak oil producing capacity within 20 years and it will take that long to find a replacement.
Last week, he told the House Energy and Commerce Committee, “The economic future of the United States is inextricably linked to Saudi Arabia because they’re the linchpin of future
world oil production.”
“No one outside of Saudi knows how much oil they have in the ground because that’s a closely held state secret. Also, no one outside of Saudi knows how much and how fast the
Saudis will be willing to develop what they have,” he said.
Moderator’s Comment: How will continuing high prices for energy affect consumer behavior and retail business operations in the years ahead?
–
George Anderson – Moderator
Until new energy alternatives hit the marketplace, which I believe have been stifled over the years by the oil companies, we will spend more of our discretionary income on oil. Trips to Vegas and the extras we enjoy will suffer, as the natural gas prices being charged this winter border on criminal.
Corn, soybeans, hydrogen, solar panels, windmills, fusion or whatever is out there have been a big bust, because no one with any clout $$$$ can make it a viable alternative solution. This is due to many factors, such as a distribution network, or capital investment on a scale to implement. My favorite is bio-diesel, which would virtually eliminate the OPEC stranglehold on America. It works, and with subsidies, we could be running our cars on used french fry oil.
Energy usage is being influenced by state and local governments, not just the federal government. Even if certain state and local governments want to follow a “hands-off the free market” policy, they inevitably influence the free market, even if it’s only to charge gasoline taxes and sales taxes on fuel and energy. In many states, local governments are taking direct action. In New York State, businesses that promise to increase employment are offered cheap hydro-generated electricity. A major retailer used this program to get cheap power for their headquarters, including their data center. In New Jersey, there are new subsidies for roof-mounted residential solar power installations. Home Depot, BP, and a network of installers are selling residential roof-mounted systems for $18,000 to $89,000 each, of which $10,000 to $53,000 is paid by the New Jersey Clean Energy Program. Car dealers use the federal tax credit to sell hybrid cars. Retex, the retailer purchasing cooperative, has a program for retailers to save energy by changing their lighting technology. Even if the federal government does nothing more to shape energy policy, the growth of entrepreneurial ways to constructively deal with energy costs cannot be stopped.
Economically we are tied to oil, until we develop stronger energy alternatives. Oil is a scarce resource which is controlled by a few countries, thus pricing will remain high (or higher) than we would like, but low enough not to drag the world into a recession. Unfortunately, both India and China are gobbling up large quantities of oil as they seek to expand their economies to meet demand. This is upsetting the delicate balance of global pricing which OPEC has been trying to maintain, and often causes rogue OPEC nations to sell their oil to these countries at any price. Tie this to unrest in South America and Africa, massive natural disasters (Katrina), and weak economies in the US and Japan and you have a brew which will continue to drive prices up. We can expect prices to remain not only above $50, but probably above $60 if the US economy falters. We can already see the impact as fewer trucks and SUVs are being purchased this year, and people are seeking out alternative means of travel. This is also translating to fewer trips out, which will eventually impact retailing. We will see a greater push from Internet shopping as this alternative not only becomes easier, but cheaper than driving around (with gas at $3 per gallon). The public is already clamoring for more hybrid vehicles, and these sales are brisk. More energy efficient homes, cars and ways to work are in everyone’s future.
Here comes a frosty winter afternoon fantasy. One thing on which consumers spend time and money is using their cars to take their kids to all sorts of activities after school. Because of this, parents ostensibly have less time to shop, prepare food and cook it for their families. This means they either eat out more, fill themselves up with fast food and/or buy prepared convenience foods. Hence less exercise, unhealthy diets and voila, hey presto, an obesity epidemic. Perhaps high fuel prices are a blessing in disguise. Less time in the car because it’s too expensive. Shopping closer to home in, perhaps, smaller grocery shops that may even provide a delivery service, fewer miles to the nearest fast food drive thru. More time to spend together and do things together. Like cooking and eating. Hey presto, lifestyle change. Silver lining. Maybe people will even spend more time with friends, family, neighbours in their neighbourhood – community – rather than living hundreds or thousands of miles away from where they were born and raised. Shades of nostalgia. Jiminy Cricket and all that. What an opportunity. What a challenge. Who needs cheap fuel?
Increased demand, higher costs to extract oil, reduced reserves in the ground, instability in the oil producing countries…guess which direction prices are headed? The only questions are how high and how fast? Combined with natural gas prices, in the short-term consumers will have considerably less disposable income. Further, inflation is an inevitable consequence. This does not bode well for retail sales. In the long-run the U.S. will have to revert back to cities (both small and large) as opposed to suburbs and exurbs for close proximity to work and shopping, similar to the European model where energy prices have been high for a long time. This means a return to central shopping districts in cities, which for most cities died more than a decade ago when suburban shopping malls took away the customer.
Oil prices will have some impact over time, but it’s the natural gas prices that will have the major impact on consumer spending.
A recent Food Institute Conference revealed that the natural gas prices will have an impact on both food production costs and on the availability of disposable income for consumers.
This is a pure marketplace issue. When the public demands an alternative (the key word there is demand), the marketplace will spin around and produce one. Neither consumers, business, producers or government have yet to show enough incentive to pursue an alternative. When they demand such an alternative, there will be a variety of offerings and the most efficient will settle in and become the standard. Until then, it is what it is. It’s that simple.