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The story of rising gas prices and what you can do to cope


Analysis


August 06, 2008
Of everything that's happened this summer, there has certainly been one topic to garner more attention than any other. It has been on the tip of every American's tongue and has subsequently left a bad taste in the mouth of most of us. The topic, of course, is gas prices and how we are all coping with the seemingly astronomical rise in fuel costs for both the everyday consumer and businesses, as well.

With the price of oil peaking at $147.27 per barrel on July 11, we have since seen a slight decline in the price to a more manageable $125 per barrel as of Aug. 4. But while this brief reprieve may have loosened the strain on many drivers' pocketbooks, the future of oil prices still seems unclear for many Americans.

The drive to record prices began early in 2008 and analysts across the spectrum still debate the cause. There are, however, a number of widely accepted factors that have led to higher prices at the pump. The chief reason for the rise in oil is the growing consumer-based economies of developing nations, most notably China and India.

According to the Washington Post, China now accounts for 40 percent of the world's demand for oil. China is now using twice as much oil as it did just 10 years ago.

But the oil is not just going towards China's industry boom; Chinese citizens are now becoming more Americanized in their desire to own their own vehicle. And not just any vehicle, but the gas-guzzling SUV that has gained so much popularity in the United States in recent years.

The Post reported an increase of 43 percent in the number of SUVs sold in the month of May compared with 2007 numbers. Full-size sedan sales were up as well with an increase of 15 percent.

The demand for oil in China is certainly growing, but unlike Americans they do not feel the pinch at the pump. In the month of June, Chinese drivers paid an average of $2.60 a gallon for gas. The low price is due to the vast amount of government subsidies poured into the oil industry in order to fuel growth. The New York Times reported that China will spend an estimated $40 billion on subsidies this year to keep the price of gas low for its citizens.

China is not alone in this practice, as India, the other developing country having a huge economic growth spurt, will spend $24.5 billion on subsidies, the Times reported.

The practice of subsidizing may be good for China and India, but it's harmful to the world economy as a whole by artificially inflating the demand for oil higher than it should be and thus causing oil prices to rise uncontrollably. Many economists have called for the end of this practice and allow the citizens of these countries to pay the true cost of the oil in order to balance the market and put the prices where they should be.

The call for ending these subsidies may be easier said than done, however, the Times alluded. In June, it reported that India attempted to scale back its subsidies, only to be met with nationwide riots over the cost of diesel, the fuel that powers most of the country's vehicles, as well as other oil products.

But even if the subsidies were ended, the fact that China and India's demand for oil will only increase cannot be ignored, and as a result gas prices will not likely fall below $3 a gallon.

Global demand is not the only reason for the increase. Supply is an issue, as well. According to the Energy Information Association's Short Term Energy Outlook for July, projections for the supply growth of oil this year have been grossly underestimated.

The report states: "At the beginning of this year, non-OPEC [Organization of Petroleum Exporting Countries] supply growth was projected to rise by 860,000 bbl/d in 2008 and by over 1.5 million bbl/d in 2009. Production is now expected to rise by only 230,000 bbl/d in 2008 and 830,000 bbl/d in 2009. Lower-than-expected production from Russia and the North Sea, along with lower expectations for Brazil, are the principal reasons for lower non-OPEC supply levels."

As for OPEC, to which the United States does not belong, production increased from last year but only slightly, with the lion's share of the increase going to Saudi Arabia, which recently increased production from 9.4 million barrels a day to 9.7 million barrels a day in July.

As a result of dismal production numbers worldwide, the available surplus capacity for the third quarter of 2008 will stand at only 1.2 million bbl/d. This will be the third consecutive quarter "that surplus stood at or below 1.5 million bbl/d," the EIA reported. All of the surplus is held by Saudi Arabia, the largest oil producer in the world.

Since oil producers worldwide are not meeting their projected yields, the decrease in projected supply causes the price of gas to go up more as demand increases.

The final major player in the price of gas is inflation. The relationship between the dollar and the price of oil is an indirect one. When the dollar loses value, the price of oil goes up and vice versa. While speculators do play some part in this by attempting to hedge against inflation by pouring money into oil, the main reason is that the dollar is still the standard for oil trades and so when the dollar becomes weak, there is an increase in price to compensate. This means less buying power for the American driver, but a more stabilized market.

While there is little that can be done for the first two reasons, inflation is something that can be curbed by the Federal Reserve with an increase in the interest rate. This is something that Federal Reserve Chairman Ben Bernanke has been reluctant to do since raising interest rates into a weakened economy could not only slow economic growth but put many Americans in the poor house. The other option, however, to let inflation to continue to run unchecked, could lead to even worse consequences. The Federal Reserve is currently in "wait and see" mode, but the coming weeks could see possible action.

These three reasons are the main culprits behind the increase in gas prices, but what explains the recent decrease? Well, Americans are partly to thank for that one. We're driving less.

The American Automobile Association recently conducted an annual survey that revealed 1.3 percent fewer Americans traveled during the Fourth of July weekend than did last year. The AAA said this was the first time in 10 years that they've seen less travel on a major holiday.

The EIA also reported that the country used 3.2 percent less gas in the month of July than the same period last year. Overall, U.S consumption of oil is projected to decline by about 400,000 bbl/d in 2008, and another 530,000 bbl/d in 2009, the EIA reported with numbers adjusted for increase ethanol and biodiesel use.

While these projections are certainly optimistic, it's important to remember that they're still only projections and can be subject to change. This was proven only too well last week when the EIA reported that U.S. gasoline supplies fell by 3.5 million barrels when they were expected to increase by 400,000 barrels. This suggests that demand in this country has decreased as much as many experts are claiming.

So why the decrease? There isn't one simple reason but rather an amalgamation of several. One factor is decreased demand on the part of the United States. Another factor is a stronger dollar on the world market. Yet, another is the withdraw of many hedge funds placed in oil by speculators who feared the hedge against inflation may be hurting the economy in the midst of a credit crunch more than helping it by driving up oil; the recent bailout of Fannie Mae and Freddie Mac convinced many of this.

But even with falling prices, the average price of a gallon of gas as of July 28 was still $3.95 and $4.60 for a gallon of diesel. The Midwest enjoys the lowest gas prices in the nation, with an average of around $3.82 for regular grade gas and $4.51 for diesel.

But even with relatively cheaper prices for those in the middle of the country, many are still feeling the pinch.

One driver, James Patterson of Lexington, Ky., expressed his dismay at the summer price surge while filling up at the Pilot station in Leavenworth. Patterson has relatives who live in Dubois County and he tries to see them a few times every summer when he has time off from his teaching job. The increase in gas has made it harder for him to travel as much this summer.

"It costs me almost twice as much now to drive from Lexington as it did last summer," Patterson said.

The younger crowd is also seeing a decrease in social time on the road as Ben Martin from Floyd Knobs pointed out from the pump at the Georgetown Marathon station.

"My friends and I used to go out driving during the summer nights," Martin said. "None of us can really afford to do that now."

Aside from these testimonials, the general buzz around the counties is that people are driving a lot less this summer than they have been, which seems to reflect national trends.

As for solutions to the gas price blues, there are many long-term and short-term fixes under debate. Alternative fuel sources and more efficient vehicles are at the top of the list. However, in addition to these large national undertakings, the average consumer can help himself by making little adjustments in everyday life.

For example, there are many obvious ways to cope with rising fuel costs (carpool, public transit, hitting all your stops in one trip, etc.), but the U.S. Department of Energy's FuelEconomy.gov site has several suggestions on how to improve gas mileage for the average driver.

Besides maintaining your vehicle with frequent check-ups and oil changes, the next biggest factor in your fuel economy is your speed. The site states that each vehicle has an optimal fuel economy at different speeds but "gas mileage usually decreases rapidly at speeds above 60 mph."

To put it in monetary terms, "You can assume that each 5 mph you drive over 60 mph is like paying an additional 30 cents per gallon for gas," the site explained. Using cruise control on the highway to keep a constant speed with less acceleration also helps in saving gas.

The Department of Energy also suggests not having excess weight in your car as each 100 pounds of added weight in your vehicle could decrease your gas mileage by as much as 2 percent.

For more information on how to get the best miles per gallon out of a car, visit www.fueleconomy.gov.

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