Blundering to $300 per Barrel: And the Blame for the Coming Period of Catastrophic Energy Price Volatility Will Be Widespread

By Verleger, Philip K., Jr. | The International Economy, Summer 2011 | Go to article overview

Blundering to $300 per Barrel: And the Blame for the Coming Period of Catastrophic Energy Price Volatility Will Be Widespread


Verleger, Philip K., Jr., The International Economy


Before the decade ends, U.S. consumers will be paying $10 per gallon for gasoline while on the same day others pay $0.50 per gallon for E85 (an 85:15 ethanol/gasoline blend). Before 2021, consumers in Europe will see diesel prices rise from the current 1.40 [euro] per liter level to 2.50 [euro] if the euro/dollar exchange rate stays where it is and taxes do not increase. Before the decade closes, U.S. consumers will also pay less than $2 per gallon for gasoline as their European counterparts pay under El per liter, again assuming no tax or exchange rate changes.

These price peaks and troughs could even occur in the same year!

Europe and the United States will likely see four major price cycles between 2012 and 2020. The cause of these ups and downs will not be the usual suspect: surging global demand. In other words, rapacious Chinese consumers will not be to blame. The twenty-first century American stagecoach, the SUV, will not be at fault either. Nor can one assign responsibility for the increased frequency and volatility of price cycles to environmentalists who delayed U.S. government efforts to accelerate offshore drilling. Lastly, the speculators and passive investors so frequently criticized for their activity in commodity markets will bear no guilt.

Instead, future historians will identify the cause as a failure to coordinate agriculture, energy, and environmental policies in major countries. They will add that misguided tax policies and incentives offered to business made the situation worse, laying the foundation for the chaos that will dominate markets for years. This disorder will knock percentage points from global growth rates, subtract trillions from global GDP, strengthen terrorists in commodity-exporting countries, and undermine respect for government institutions.

Make no mistake about it. The rise in petroleum retail prices and the discrepancy between renewable fuel and traditional gasoline prices will denigrate the public view of the U.S. government in a way that rivals the widespread civic ire brought on by the 2008 bank bailouts. President Obama has already seen his credibility undermined by gasoline prices rising unnecessarily from $3 to $4 per gallon. The situation will get worse.

Blame for the increased volatility can and must be spread widely. Necessary and important environmental regulations have been poorly drafted, needlessly squeezing clean fuel supplies. Conservation-oriented energy policies in Europe inadvertently boosted diesel fuel consumption without providing a compensating supply boost. Laws requiring increased renewable fuel use (ethanol mostly) could create monumental market distortions. Current circumstances have given multinational oil companies huge financial incentives to produce more crude oil rather than invest in much-needed refinery upgrades. These policies force oil-exporting countries to limit heavy sour crude production to maximize revenue. Lastly, the global oil industry has kept its head tucked firmly in the sand (or worse) for more than forty years now. Whereas brilliant leaders have emerged in energy sectors such as the U.S. power generation business, bland faceless individuals unwilling to venture far from narrow silos still dominate the international oil industry.

Tighter environmental regulations are a primary contributor to the greater oil price volatility. Over [he last three decades, new environmental rules have been imposed on fuels sold in the United States, Europe, Japan, China, and much of the developing world. Initially, regulators mandated lead removal from gasoline. Then, over the last twenty-five years, they have demanded the removal of sulfur and other harmful chemicals. Much of the focus has been on sulfur. Diesel fuel once contained as much as 25,000 parts per million. (Those of a certain age will remember the black smoke belching from trucks and buses. That choking exhaust came from sulfur in the fuel. …

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