I've Got $4 a Gallon, Do I Hear 5 ?

“Y'all thought ol' Spindletop and Burkburnett was all the oil there was, didn't ya? Well, I'm here to tell you that it ain't, boy! It's here, and there ain't a dang thing you gonna do about it!”
-Jett Rink


Back in January of 2011, I wrote about the risks our economy faces when energy prices increase dramatically. In late December, I made my predictions for 2012. (OK, so I was wrong about the Packers, but New England did get to the SB and lost. So I get partial credit). One of my predictions was this:

“Big trouble in the Middle East. Things will come to a head this year and the results will drive up oil prices and cripple the global economy in the second half of the year.”

I also made this prediction:

“The U.S. economy overcomes the impact (of these predictions), limps along and fairs better than many of our global competitors.”

The first one about rising oil prices seems to be coming true and ahead of schedule. This is really bad news for our economy. If gas prices go up a $1 per gallon it effectively takes $125,000,000,000 (that would be billions) annually out of our consumer economy. Apply a 2 or 3 multiple to the benefit of those dollars being spent on consumer goods and services (not only here but in those countries that make so much of the stuff we buy) and the impact is truly devastating. While I still think the second prediction is accurate: the U.S. economy will out-perform most of our global competitors; the rising cost of energy will very likely knock the legs out of the recovery.

Unfortunately, there’s not much we can do to avoid the negative consequences this time around. We’ve piddled and fiddled around on expanding our pipeline and refining capacity. So even though we’ve increased domestic production, it’s not going to help us much in the short run. Plus we live in a global market where demand for oil is increasing. If the rest of the world is willing to pay $5 or $10 for a gallon of gasoline, we won’t be getting it for $3.

In the long-run we’ll figure out ways to live more fuel efficiently. We don’t have much of a choice. Ten years from now I predict that over half of our commercial vehicles will run on natural gas. 80 percent of the cars on the road will be getting 40+ mpg. Global oil production as well as domestic production will far exceed most current projections. We will still live in a world that runs on fossil fuel. But in the short run, we are in for some serious pain at the pump. And at a time when the government cannot afford to “cover” the increased cost of transportation; we’ll just have to live with it. Whoever ends up in the White House for the next fours years (and I did predict that it would be President Obama), is going to have a very bumpy ride.