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Energy the nexus of everything: May 2011 Archives

The USA Today is not known to provide the most in-depth analysis of US news, but a recent article I read while traveling caught my attention. The article discussed the 'high' gasoline prices of $4/gallon in the United States and the economic hardship caused by spending more money on energy. I will not discuss the many reasons, some beyond personal choice and some not, that relatively lower gasoline (or petrol) prices in the US cause economic difficulty versus different prices in the EU.

The interesting quote in the article was from a woman living in New Jersey that worked in Washington, DC. She commuted 230 miles (one way) twice a week for work, and now sold her Mercedes-Benz for a Nissan Versa compact car. The higher transportation costs clearly are imposing new priorities for her. This woman's quote was as follows:

"We're the victims of circumstance, but I don't necessarily understand what the circumstance is…"

This was actually quite a refreshing quote to me in that it signals that at least one American recognizes that she does not immediately need to singly blame the oil industry, the government, or even consumers like herself. It also presents some evidence of self-realization lacking in most Americans. The fact that she made a choice to a more fuel-efficient car for her long commute signifies that she realizes via her consumption patterns she is a large part of the solution. Demand for oil increases, largely now from Asian economies, and new oil production locations struggle to replace existing production declines but from lower quality and higher cost (lower net energy) resources. We need our government to level with the public that alternatives to conventional petroleum, including unconventional resources such as oil sands and oil shale (if it can ever produced economically in the US), all cost more.

The only way worldwide production will even struggle to stay level is to keep production costs near current levels. And it is these current levels of oil price near $100/BBL that are forcing the US economy to reconfigure itself. Part of this reconfiguration is for consumers to switch to lower-consuming lifestyles. Part of this reconfiguration is higher efficiency standards from the government. And yes, part of the solution is likely more offshore drilling, but not because it is likely to decrease gasoline prices, but because it will show the inability of US production to significantly impact oil price any longer. Even Energy Information Administration (EIA) projections estimate that significantly expanded US offshore oil production will impact gasoline prices on the order of single cents per gallon. This amount is in the noise of any meaningful impact. Most EIA and International Energy Agency (IEA) projections also are now estimating constant or slightly declining oil consumption in the US. Part of this consumption trend is due to demand destruction via price, and part is due to transitioning to other fuels such as electricity and ethanol. At the moment (and perhaps always), these non-fossil transportation alternatives are also more expensive than gasoline from $100/BBL oil.

Future choices by US consumers and governments from local to federal levels need to consider resilience to energy prices instead of only efficiency such that energy price impacts are mitigated rather than amplified.