What drives prices?

Demand the big factor in fuel costs

Posted: Monday, September 19, 2005

Drivers today snap their heads around to read filling station price signs the way teenage boys ogle girls. A low price is almost a thing of beauty these days.

But what's causing prices at the pump to hover in record territory?

Experts point to you and your friends, but also to foreign affairs and American politics.

Your driving, and that of other people across the country, helps drive up what economists call the "demand" for gas. The more people wanting to buy something, the higher the price goes.

So, people moving from densely populated cities in the north to suburbs in the Sunbelt need more fuel to propel their vehicles. Plus, we've been buying heavier SUVs, minivans and pickup trucks in the last 20 years to buzz around those suburbs, drinking more gas.

People attach their identity to their cars and mobility, says Doug Bachtel, a demographer with the College of Family and Consumer Sciences at the University of Georgia.

"It's really going to be hard to pry aging baby boomers' bony fingers from the steering wheel," he said. "They grew up in the car, and they live in the car. They may have even been conceived in a car."

Cup holders, books on tape, cell phones and satellite radio not only make commuting more enjoyable but permit the kind of multitasking that helps drivers rationalize keeping their vehicles rather than taking mass transit, he said. And as gas prices rise, drivers will make the smallest possible change in their lifestyle, such as buying a car that gets better mileage rather than uprooting the family for a move from the suburbs, he said.

"It's an individual decision that various people will make at different points in their life. ... Everybody's pain threshold is different."

The record $3.06 price per gallon national average that AAA reports occurred Sept. 5 has spurred some drivers to downsize. A survey of 500 adult drivers by R.L. Polk & Co. shows that 55 percent of those questioned say their next car will gulp less gas. In the meantime, 59 percent of those responding said they'll drive less.

But not everyone is cutting back, such as driver Lisa Thompson who has had two SUVs and enjoys their big engines and the enhanced visibility from the driver's seat, like her latest Ford Expedition. She isn't about to let anyone talk her out of her preference for horsepower.

"When I bought it, I really did not consider gas mileage," she said. "... I am very opinionated when it comes to tree huggers."

The Natural Resources Defense Council blames big vehicles for the bulk of the increased demand and says the government should require greater fuel efficiency on them.

"Raising the standards for vehicles is the biggest thing we can do to reduce oil dependence," said the organization's senior environmental scientist, Dan Lashof.

He contends that if the mileage standards had been raised high enough 10 years ago, crude oil would be selling for $20 a barrel less.

Ron DeFore, spokesman for the Sport Utility Vehicle Owners of America says lower requirements would have forced manufacturers to drop vehicle weight that saves lives. Besides, the U.S. isn't the only country to blame for increased gasoline demand.

"The high gas prices have far more to do with the dramatically increasing demands from developing countries like China and India," he said. "You could eliminate all SUVs tomorrow, and that would have no impact on the world oil market."

Others agree. Experts like Craig Smith, author of Black Gold Stranglehold: The Myth of Scarcity and the Politics of Oil, coming out in October and president of Swiss America Trading Corporation, note that China's gasoline usage has increased 34 percent between 2000 and 2004. India's consumption jumped 13 percent in the same period, while U.S. consumption only rose 4 percent.

China's and India's energy demands aren't likely to shrink because those countries are rapidly building factories, roads and enriching their workers who are buying cars for the first time.

Smith would solve the problem by allowing drilling in parts of America that are currently off limits due to environmental concerns — the Arctic National Wildlife Reserve (ANWR) in Alaska and off the coast of California and the Great Basin that covers parts of California, Nevada, Colorado and New Mexico. He said an announcement by President Bush of new drilling would knock 20 percent off the world gas price overnight.

While global demand has risen steeply in recent years and won't soon dissipate, Middle Eastern terrorism is a reversible trigger, according to Smith.

"I personally believe that is the single largest element," he said. "If you look at the price of oil since we went into Iraq, it's done nothing but go straight up."

"It doesn't look very hopeful in the near future for the price to come down," Smith said.

Other factors also contribute to the price, such as the fixed number of domestic refineries and the growing number of gasoline blends they must turn out to meet varying environmental regulations in cities like Atlanta and Los Angeles with substandard air quality. The last new refinery was built more than 30 years ago while demand and the number of blends grew exponentially.

Not everyone is pessimistic. Nationally renowned economic forecaster Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University, sees the price of oil declining soon.

"Trust me, a sustained $3-plus a gallon of gasoline at the pump will make even lead-foots like me drive conservatively," he writes in his quarterly forecast released Wednesday. "This force is very strong, but it takes a while to register."

He notes that federal income-tax cuts and discounts on the price of new cars have cushioned the shock of gas prices so far, but when their effect wears off, drivers will change behavior until the reduced demand tugs prices downward.

Even skeptical observers of the oil industry believe prices will retreat now that the vacation driving season is over after Labor Day. How far prices drop and how long they stay down are topics any motorist is qualified to debate.

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