Remember When Gas Was Cheap?

[Readers please note that this post is written as a post to the blog April 20, 2009]

Remember when gas was cheap? Remember back in 2006 when gas was just above $3.00 a gallon and it was the top story on the evening newscasts? Well that now looks like the ‘good old days’.

Yesterday the June 2009 futures for a barrel of oil was $137 and the national average price for a gallon of gas in the U.S. was $7.33. Oil has now been over the $130 mark for six months, and during that time the average gas price has been around $7.25. It is interesting that this price of gas seems to be less of a story than the $3.00 price was three years ago. Given our collective experience around this topic over the past three years, this is not surprising. Let’s take a quick look back at the last three years to the series of events that brought us to this point and all the global dynamics that were involved.

September 2005 – In the aftermath of hurricane Katrina, gasoline went above $3.00 for the first time in U.S. history. At the time we were all shocked but thought that it would be temporary until the gulf coast refining capacity was restored. Because of the suffering of the gulf coast residents, we moaned about our economic pain at the pump, but sucked it up as we had nothing to complain about in comparison. At the time we did little more than think twice about making spontaneous trips to the mall, and eliminating the SUV as a possibility while looking at buying a new car.

April 2006 – Gas prices went over $3.00 for the first time since Katrina. Not only did it become a story on the news, but we were told that “government officials” said that the price would not go up too much more than that “unless something bad happened during the summer driving season”. What? When the other news stories of the day were the Iraq war and the resultant drop in it’s oil production, the fact that there was still significant gulf coast refining capacity that had yet to come back on-line since Katrina, than tension with Iran was increasing, that the 2006 hurricane season might be even worse than 2005, that China’s GNP had gone up 10% the three months prior and that country’s energy demands were increasing at the same rate? Ok, we got it: no government leadership available here.

July 2006 There was general outrage at the pump and on the airwaves, when Americans hit the road for the July 4th weekend paying an average of $3.60 a gallon. The Bush administration tried to channel this anger into getting public opinion around opening up Alaska and other places for the drilling of oil. It was reported that major auto dealerships had an average of a five month supply of SUVs and large pick-up trucks on their lots, the greatest inventory backlog ever.

September – October 2006 Gas prices went over $4.00 for the first time due to several factors: the damage that the August hurricanes did to the gulf coast refineries, the loss in oil output from Nigeria, and the increasing energy demands of China that put pressure on the demand side of the equation. The Bush administration said that they would redeploy a greater number of military personnel to help increase the supply of oil coming out of Iraq. The Democrats in Congress beat the election drums loudly with the message that the country was adrift without a forward thinking energy policy.

November 2006 In a stunning victory that was historic in its magnitude, the Democrats won both the Senate and the House of Representatives. Exit polling, and therefore the election analysts, said that, after the Iraq war, the single most important issue that drove voters into the Democratic camp was the price of gasoline and the belief that the Republicans had no clear energy strategy. For the first time in years, the Democrats had found an emotional issue that they could ride to electoral victory.

April 2007 Congress overwhelmingly passed an energy bill that had several key components: a gasoline tax that started at $.25 a gallon, increasing to a $1.00 over four years, new stringent guidelines on average mpg for all automotive manufacturing companies, and investment tax credits for practically any type of alternative energy ideas and companies. At the last minute, the $2.500 surcharge on all SUVs and non-commercial use pick-up trucks were taken out of the bill, as GM said that it would have no recourse but to enter bankruptcy and immediately lay-off 50,000 workers, and few politicians had stomach for the economic impact of that probability. So many Republicans, getting the message from the fall elections, voted for these bills that it was clear that a Bush veto would be easily overridden.

September 2007 The gas tax went into effect and the average price of gas was $4.45 in the U.S. There were news stories around the fact that the best values on the used car markets were ‘previously owned’ SUVs and that some buyers had done the math to show that since SUVs were so below value compared to the rest of the ‘previously owned’ market that if the use expectancy of a used car was three years or less, the dramatically lower price of the SUV more than offset the increased costs of gasoline.

October 2007 GM announced it was shutting down it’s Hummer division as dealers were refusing to take shipment on any more vehicles. This of course made Hummers collectibles. There was so much cultural antipathy toward SUVs that it becamse a social phenomenom to have the “This is a hybrid SUV” bumper sticker on one’s SUV, even if it wasn’t.

February 2008 Due to a stunning confluence of events, the price of oil went over $125 a barrel and gas went to $6.25 a gallon in the U.S. and 50% higher in Europe. The extremely cold weather in Europe and Russia put an upward pressure on the price of heating oil, the sabotage of the Iraq refineries as the U.S. forces were being rapidly drawn down, the decision by the Chinese government that it made more economic sense to bid up the price of oil to support the continuing double digit growthof it’s national economy than to slow it down, and the decision by OPEC to move to a supply and demand pricing model rather than have any target price to manage against all came together to forever change the energy landscape. There were predictions that this would trigger a major recession as the addiction to petroleum was systemic in the U.S. economy. These of course proved to be painfully true.

March 2008 It was widely reported in the financial press that vast amounts of venture capital and private equity funding was flowing into all forms of alternative energy companies. It was estimated that the percentage of invested funds in alternative energy was greater than the percentage of invested funds in dotcoms during 1998-2000.

May 2008 It was becoming apparent that a major shift was occurring in the real estate market in the U.S. Buyers had stopped buying ‘McMansions’ in exurbia almost regardless of how much the prices were lowered. Conversely, the condo market in urban downtowns positively exploded. Amount of space (to be heated) and distance from the urban centers (commute cost) became liabilities in the real estate market. It became both ‘green’ and ‘hip’ to say one worked at home or walked to work.

October 2008 For the first time in history both presidential candidates went out of their way to ‘outgreen’ the other candidate. It became clear that whoever won would be the most environmentally friendly President in history.

January 2009 It was reported that the percentage of on-line shopping during the holiday season, had, for the first time, crossed the 30% threshold as people realized that paying for shipping was cheaper than driving around shopping. The stocks of overnight package companies such as Fedex and UPS were at all time highs. At the same time, owners of several large malls announced closing for good as the holiday season shopping numbers had not been enought to sustain their tenants. In the state of the union address, the new President put forth an incredibly broad energy policy of tax incentives, recycling initiatives, a record investment in creating universal no-cost broadband access, and a clear goal of committing the U.S. to have petroleum be less than 50% of energy used by the year 2015.

February 2009 It was announced by the new adminsitration that 2008 was the first year in recent history when actual consumption of all petroleum products had dropped by 10%. Of course this lower demand in the U.S. had more than been offset by the growing demands for energy in China, India and Eastern Europe.

March 2009 The energy bills introduced by the administration the day after the state of the union address were passed by Congress in record time. Due to a rider that had been attached to one of the bills, the new Federal Department of Railroad Investment was created. A variety of groups had come together to lobby Congress, fueled by the fact that cheap airline tickets had become a distant memory and people had begun to feel almost house bound by the high price of gasoline. GM and Boeing announced a partnership to build energy efficient high speed trains, utilizing all of their combined idle manufacturing capacity.

So, as we look back from the vantage point of April 2009, it has become clear that the country, and many parts of the world had started to move through the painful, dangerous beginning of a transition away from petroleum dependency. The outlook is moving toward optimism, but in hindsight, the past three years since oil topped $70 a barrel for the first time, could have been less painful had the anger at the pump three years ago been channeled more quickly into the emerging energy policies of today.

10 Responses to “Remember When Gas Was Cheap?”

  1. joy darrow Says:

    I fear your predictions might be true. I hope you are wrong about gas at $3.60 by July as we are planning to take a road trip that month. I feel trapped. Airfares have gone way up too.

  2. david Says:

    I think that $3.60 could be a low prediction, sorry.

  3. Jeff (Carrie's husband) Says:

    David,
    When I finished reading, all I said was “WOW”. Your thought process was a pleasure to follow.

  4. Will Says:

    I tend to think that many of your early predictions (over the next year ) seem pretty reasonable, but after that, IMHO, you seriously underestimate the political inertia in this country. The country and even a Democratic Congress would not be willing to stomach a significant gas tax as you suggest, if any at all. Not in the era of attack politics that we live in. Not in an era where we are being asked to “sacrifice” with our troops by shopping.

    I agree that investment tax credits probably will be given, primarily to rich companies that don’t need them and will use them primarlily to generate patents, close off competition and maintain marketshare.

    Then again maybe I’m just a cynic. I actually hope some of the stuff you suggest happens, as ugly as it would be for the country we need a wakeup call.

  5. george rosenbaum Says:

    David..we can expect price to retreat perhaps to the $2.80s for the coming weeks and then step back up to
    $3.00 and step up to the next level of about $3.25, and then again the same pattern. This has been pretty much the pattern as we escalated up from $1.00. It is unlikely to occur so quickly that it would be at the $4 level by July of this year. Looking further out, your $7 scenario is likely to be accomanies by big cut backs in intial investment in cars and in purchases of fuel efficient engines. On the way up to $7 we would also see great impetus to alternative sources of energy and solution to their distribution problems e.g. ethanol. As this kicks in it may very well slow down price escalation well before it gets to the $7 mark. On the way to $7 inflation would reignite. There are many forces that will seek to counter this.

  6. david Says:

    George – You certainly could be right. However, keep in mind the influence of panic and bad news on gas prices. Where might good news be coming from in the next couple of months? Also, the lead time for an automotive company to retool is years. The good news is that the higher the price of gas, the greater economic incentive for other types of energy and the greater the urge to alter behavior.

  7. Steve Garrison Says:

    I think your scenario seems plausible, though I’d differ on a few points. First, I think that any gas tax would be the first thing to go as gas prices begin to escalate. Politicians would be worried that they’d be seen as “making a bad situation worse” by “forcing the poor to pay even more for their gas” or something of that nature. If anything, it might even be subsidized in part (for certain people) by the government seeking to curb everyone’s gas worries. Second, the notion of presidents “out-greening” each other sounds great, but implausible. There are surely going to be other issues besides rising energy prices that politicians will be concerned with, and they will also try to put a spin on it that has nothing to do with green-ness. For example, they may say we have to redouble our efforts to drill in previously noncost-effective oil fields, or they may say we need to strike back at OPEC in some fashion.

  8. david Says:

    you may be right on the gas tax, but I think you will be surprised about how ‘green’ the 2008 presidential campaign will be.

  9. valerie Says:

    what about the energy policy act of 2005? it’s not great but at least it does have lots of incentives for alternative fuel vehicles and hybrids as well as conservation and energy efficiency. Also a surprsiing 4.3 billion tax break for nuclear power, which may be considered an option again, even though we still haven’t figured out how to handle the wastes.

    Maybe people don’t see it as ‘a clear energy policy’ because there are so many pieces to the act?

    Overall I strongly agree with your scenario that petroleum prices are finally rising to the point where we will seriously purse alternatives.

  10. Future of Energy - The Short and Long Term Price of Oil | Evolution Shift - David Houle, Futurist, Disintermediation, Future Trends, Future of Energy Says:

    [...] years ago in this blog, I wrote a futuristic column from April 20, 2009. The title of the column was “Remember When Gas Was Cheap?” At that time I [...]

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