CLARKONOMICS: Gas prices are $3.70 a gallon (national average) and climbing. What’s that going to mean as you look down the road a few months?
Here we are with the highest prices we’ve ever had at this point in the year, not inflation adjusted. Based on historical patterns of pricing, people who follow these things are extrapolating that it will mean $5 a gallon by Memorial Day!
If you just went by historical patterns, that might be the answer you’d arrive at. However, we’re not in a normal historical pattern. Demand is down 7% year over year. That is a huge decline. We’re buying more fuel efficient vehicles and people are driving less. That translates to fewer gallons of gas.
So the run-up right now is almost completely about Iran. Iran creates the kind of uncertainty that capitalists can’t stand. If we go to war over the nukes, it will be messy for a while and our lives will be disrupted temporarily with much higher prices — but it will be less disruption than if nukes go off around the world!
However, if things cool down with Iran, because demand is weak around the world for oil, prices will decline. The fundamentals of the marketplace, absent the stuff with Iran, call for lower prices, not higher.
Fortunately, we’re in a different cycle moving forward. The long-term trends with the development of new sources of energy in the U.S. and OPEC now accounting for only somewhere around 30% of world oil production are both positive signs.
In addition, our historical patterns were based on the U.S. being a key player in worldwide oil demand. That hat has passed to China as their economy has grown. They now have more to do with worldwide demand than we do.
In your own life, when the natural cycle comes to replace a vehicle, get the most efficient vehicle of the size that fits your lifestyle that you can afford.
I’ve noticed at my daughter’s school that the older SUVs many parents are driving are much bigger than the newer SUVs other parents are driving. The cycle is that as a parent replaces an SUV that a kid goes to school in, the new SUV is significantly smaller, taking them from 13 or 14 miles per gallon to 22 or 24 mpgs.
That is a big shift in a family budget and a big shift in overall consumption as you rotate forward through the years and consider how much energy we use.