Driving Prices Higher
It's little consolation that Americans spend relatively lesson gas than a generation ago: $3 a gallon and up still hurts
Gas prices are hitting record highs, sending the nation into a spasm of shared angst. Average prices nationwide now exceed $3.22 for a gallon of regular, and many people are pledging to drive less while politicians agitate against "price gouging" and fat oil company profits.
Yawn. If recent history is a guide, nothing significant will ensue. While prices are expected to stay high through the summer, it seems Americans are unlikely to trim many miles from their life on the road. "How can I?" says Nick Wolfe while filling up his Land Rover SUV in a St. Louis suburb. "I'm a salesman and need to drive." Drivers in a Washington Post/ABC News poll said it would take $4.38-a-gallon gas on average to make them cut back. So, Wolfe and most Americans will suck it up and absorb the cost, and the issue will fade along with prices next fall, well before Washington does anything noteworthy.
While gas prices have soared, Americans are wealthier than 30 years ago, easing the pain (chart). "Energy is a smaller part of the overall budget," says Stephen Brown, an economist at the Federal Reserve Bank of Dallas. Prices would have to rise another dollar before typical consumers would feel as pinched as in 1980, according to estimates by the libertarian Cato Institute.
Still, prices have spiked 50 percent since late January and are expected to climb more—perhaps substantially if there's an active hurricane season, as predicted. Prices have already exceeded forecasts for the usual hikes that precede summer's driving season—and are higher than last year, though the cost of crude oil, about $65 a barrel, is lower.
Refineries. Energy experts cite surprising demand in U.S. markets for more gas. "At the same time, supply is struggling to keep up," says Rayola Dougher of the American Petroleum Institute. For some months, U.S. gas imports fell because less was available after political unrest in Nigeria and refinery problems in Venezuela. That coincided with operating problems at U.S. refineries, including several fires, further straining a system already slipping behind demand. No new American refineries have been built since 1976, and dozens have closed. Still, the industry produces more gas, mostly by adding capacity to existing sites—just not enough to keep pace with demand.
The refinery issues are drawing attention in Washington, where suspicions abound that oil companies have conspired to reduce production. Mergers of oil companies give them more power to keep prices high, the Government Accountability Office said last week, although the Federal Trade Commission says it has found no evidence of gouging or collusion. "There is no smoking gun," concedes Daniel Weiss of the left-leaning Center for American Progress. "But it doesn't look good."
His group's report, "Pain in the Gas," spotlights those most hurt by rising fuel prices: lower-income consumers. They cut vacations, gifts, dinners out, and savings—or, more likely, run up bigger credit card balances, say the authors. Swings in energy costs, more dramatic here than in other industrialized nations, also make it hard for consumers to plan. "The price signals are just out of whack," says study coauthor Christian Weller.
Gas is too essential to leave to purely market forces, said a letter from 22 governors sent last week to Congress. Both President Bush and Democratic leaders have responded by trying to raise mileage standards on new automobiles, a move critics suggest merely encourages people to drive more miles. The House also passed a bill that would punish anyone who artificially hikes fuel prices, which prompted the Bush administration to conjure up ghosts of gas lines past. Energy Secretary Samuel Bodman called the price-gouging measure a "gasoline price-control bill," arguing that it could bring back 1970s-style gas lines.
Those run-ups also occurred almost overnight, says Brown of the Dallas Fed. This time around, gas has several times neared or exceeded $3 a gallon, with prices climbing more steadily. "We've had much more time to adjust," he explains. Industries might find cheaper energy, and conservation can take hold. "If prices stay high, I'll definitely look at getting a different car," says Wolfe, the St. Louis SUV owner. Still, there are signs that the volatility is hitting sectors of the economy, including discount retailers like Wal-Mart, and that sustained prices of $3 or more will begin to curb driving. Some government data suggest that motorists drove fewer miles in the first quarter of this year than a year ago.
But lifestyle changes make it difficult to significantly cut driving. Two-income families put two cars on the road, often to homes in distant suburbs or ferrying kids. "I grew up in the '70s and rode my bike to soccer," says Christopher Knittel at the University of California-Davis. "Now we drive kids there."
Americans don't cut back so quickly on driving after fuel prices rise, at least not as they did in the 1970s, according to a study that Knittel coauthored. It would take a price increase about five times as high as the ones back then to get the same response from U.S. drivers, he says. That would suggest prices would have to leap several dollars a gallon. In other words, says Knittel, "prices have to skyrocket to have much effect."
This story appears in the June 4, 2007 print edition of U.S. News & World Report.