Payment at the Pump

In a recent article released by The Economist titled “Feeling Perky: The economic impact of high oil prices,” the cause and potential effects of high oil prices are generally explored.  Many of us are currently experiencing the impact of high oil prices on our wallets and the dread of seeing the illumination of the fuel light.  Some of us drive relatively fuel efficient automobiles such as hybrids and are therefore less impacted by recent increases in gasoline prices.  On the other hand some of us require the use of a SUV, truck, or maybe we just enjoy cruising down the highway in our 1984 Mercury Grand Marquis.  Whatever the reason we are stuck paying the $70+ tab each time we stop in to fill up the tank, and by now some of us are becoming disgruntled.  This begs the question, why have fuel prices risen so drastically and what can we expect from here?

As the article mentions, recent news media chatter has blamed a large portion of the rise in oil prices on oil “speculators.”  In response Obama has rolled out new legislation in an effort to stop these speculators by increasing penalties for market manipulation.  Another explanation for the rise in oil prices is increasing global demand on a fixed global supply.

According to the article, the most likely explanation for rising oil prices is simply that demand is outpacing supply.  Increased demand can be seen in the transition of oil exporting countries into oil importing countries.  These new oil importers are now adding to the load of the diminishing number of oil exporting countries.  In essence there are now more people at the Thanksgiving table, but we still have the same 3 pound turkey.  The effects of rising oil prices are most likely modest at a global level, however we (U.S.) are not concerned with global GDP (Gross Domestic Product) we are concerned with U.S. GDP.  As the article mentions, U.S. GDP will be affected more than global GDP because the U.S. is paying the higher prices by importing oil.

As the article explains there is no easy way out of higher oil prices for two reasons.  First, other sources of energy production are more expensive relative to how much energy is produced.  Second, the cost of transitioning to a new fuel source is high.  So what does it all mean?  The article states that for the economic boom to continue developed and developing nations will need an energy source that is abundant, cheap, and efficient.

 

Source article: http://www.economist.com/node/21553034