Explaining Southern California's economy

Gas prices: It's about the efficiency, people!

Mercer 20784

Corey Bridwell/KPCC

Gas prices at a Chevron station in Pasadena, CA.

As the price of oil pushes higher and gas prices ascend nationwide to levels we're already seeing in California, there's been unleashed a fury of discussion about "Why, oh why?" this is happening. Speculation on oil futures has been blamed (Hedge funds!), as has the threat of an Israeli strike on Iran's nuclear sites or a temporary shutdown of the Strait of Hormuz by Iran itself.

Neither makes much sense to me, although there may be elements of the true story in each. Speculators can drive prices up just to bet on them falling, so you have to factor in a certain amount of volatility there. As for Iran's naval capabilities...well, the Strait could be closed for maybe a few days, possibly even a week. But it wouldn't take long for the U.S. Navy to sink pretty much everything Iran has that floats.

What I think is really happening is a combination of reduced refinery capacity and increased vehicle efficiency. We're in a transitional energy period right now. In the U.S., we'll need to refine less fuel for vehicle use, and so refineries are shutting down and the industry is being fragmented into smaller players who can fight over tighter profits. 

Driving this is the anticipation that cars are going to go longer between fill-ups in the future. This expectation is being driven by advances in internal combustion engines, as well as by hybrids and plug-in hybrids — cars that run on combinations of electricity and gas.

Over time, this is going to mean reduced U.S. oil imports. As we develop more oil and gas discoveries here at home, we'll be able to run our more efficient auto fleet on homebrewed fuel. This will really kick into high gear once we begin to switch freight-oriented truck transit to natural gas, abundant supplies of which we're now accessing through fracking technology, on our way to becoming (maybe) the world's top energy producer by 2020.

It could take a decade, but we're looking the very opposite of a "peak oil" future. Sure, global oil reserves may decline. They may even be more rapidly depleted as the developing world's appetite for personal mobility ramps up. 

And we may never again see an era of sub-$2 gas. My feeling is that even the combination of new sources of oil and increased vehicle efficient may create an eventual plateau around $4-5 a gallon. And at that point we can tackle the more vexing problem, which is traffic. We may never have cheap gas again, but we might need gas that's expensive enough to get cars off the road.

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