The Oil Factor; Our Columnist on Why Gas Prices Are Soaring-And Why They Haven't Hurt the Brisk U.S. Economy. Yet
Byline: Robert J. Samuelson
The United States has the energy policy it deserves, although not the one that it needs. Having been told for years that their addiction to cheap gasoline was on a collision course with increasingly insecure supplies of foreign oil, Americans are horrified to discover that this is actually the case. And yet, for all the public outcry and political hysteria over high gasoline prices, they haven't yet significantly hurt the economy--and may not do so. Since 2003, the economy has grown about 3.6 percent annually. It's still advancing briskly. That may be the real news.
But first, how did we get to $3 a gallon? The basic story is simple enough. Oil was cheap in the 1990s. From 1993 to 1999, crude prices averaged about $17 a barrel. Low prices discouraged exploration; they encouraged consumption. China emerged as a big user. In 1995, global demand was about 70 million barrels daily (mbd); now it's almost 84 mbd. Spare production capacity slowly vanished, meaning that now any supply interruption--or rumor of interruption--sends prices up sharply. An Iraqi pipeline is attacked; prices jump. Nigerian rebels menace oilfields; prices jump.
These pressures get transmitted quickly to the pump, because there are few fixed-price contracts in the oil business. At each stage of distribution--from producers to refiners, from refiners to retailers--prices are adjusted quickly. They're often tied to prices on major commodities exchanges, where oil and other raw materials are traded. "A gas station will get a delivery every four to eight days [at a different price]," says Mary Novak of Global Insight. Even between deliveries, station owners may push prices up because they know that "for my next tankload, I'll have to pay the market price."
Of course, profits have exploded. Production and refining costs haven't risen in tandem with prices. To the extent that oil companies have their own crude reserves--as opposed to buying from producing nations--they've reaped a bonanza. From 2002 to 2005, profits for major oil companies more than quadrupled to almost $140 billion a year, reports the American Petroleum Institute. But the really big winners are the oil-producing countries. In 2005, their oil revenues exceeded $750 billion, up from $300 billion in 2002. (For gasoline, crude oil and taxes represent about three quarters of the retail price; refining, distribution and marketing account for the rest.)
It's conventional wisdom that big oil-price increases usually trigger a recession--or at least a sharp slowdown. Why haven't they? One oft-cited reason is that the economy has become more energy-efficient. …