On Empty and (Almost) Out of Time
I interrupt my series of articles on "Green Entrepreneurship" to talk about what's going on at our gasoline pumps and meters. The bottom line is this: don't be fooled by lower gasoline prices, and know that the price of energy will continue to rise in the long run. So dust off your old assumptions about financial paybacks and immediately begin investing in technologies that reduce energy consumption.
Let's start with oil. I just published a book called On Empty (Out of Time) . Chapter 4 explains how gasoline prices are impacted by the global supply and demand for oil. Here's why our pump prices are going down today:
- About two weeks before the price of oil started to fall, China raised the subsidized prices it charges at the pump for gasoline and diesel, and took millions of cars off the roads to reduce air pollution in Beijing during the Olympics. Both actions resulted in reduced oil demand by China.
- Americans have reduced their driving by approximately 5 percent and are shifting their preference toward higher-mileage vehicles in response to $4-per-gallon gasoline prices.
- The American dollar (which is the currency used in oil contracts) is strengthening against the Euro because Europe (and Japan) are facing recessionary economic declines. This means we get more oil per dollar as traders stop hedging against the decline in the United States' dollar by buying commodities such as oil.
So the next questions are: a) how low will prices fall and b) how long will they stay down? In the short-term, the price of oil and our pump prices could see further price reductions for two reasons:
- Globally, many nations are getting dangerously close to a recession, which means the demand for goods and services, including oil, will decline.
- A global green economic revolution has started that will produce new technologies that will be cheaper and cleaner than using oil. That will reduce demand and, therefore, prices.
How low could our pump prices fall? It's possible we'll see $3-per-gallon gasoline again. Hopefully we won't. I say that because if we do see $3-per-gallon gas prices in the coming months, it will probably mean the U.S. is in a recession.
In Chapter 11 of On Empty (Out of Time), I talk about China and India. The reason why oil prices will rise over the long-term is as obvious as what you're seeing in the broadcasts of the Olympics being held in Beijing, China.
What the Olympic broadcasts are showing is that China has succeeded in building a middle class equal in size to the entire population of the U.S. At the same time, approximately 900 million Chinese (three times the population of the U.S.) are still aspiring to gain middle-class status.
In India, 400 million people (100 million more people than the entire population of the U.S.) do not have electricity service, but they're working very hard to get it.
So, in these two countries alone, we have populations four times the size of the U.S. seeking a comparable level of prosperity and well-being. This is the underlying factor in the world oil market that's going to drive up oil prices.
What is the answer? I'm not making a political statement when I assure you that a massive offshore oil-drilling effort by the U.S. will not reduce prices at the pump. It might slow the rate of price increase but it won't bring prices down. Here are the core numbers:
Annual U.S. oil demand:
7.5 billion barrels
Current estimate of offshore oil supply potential:
11-plus billion barrels