Hitchhiker's guide to gas prices: Don't panic!

Posted: Jul 06, 2008 12:00 AM
Hitchhiker's guide to gas prices: Don't panic!

“Gas prices will never go down.”

“The price at the pump can only go higher.”

“High prices are here to stay.”

This seems to be the current wisdom. I hear it everywhere. There’s no need for a specific citation, for you’ve heard it too.

But why should we believe it? Gas prices have gone down in the past. Why not again?

Two words: Peak Oil.

Or make that three: Peak Oil blather.

In a Wikipedia article on gas prices, we are told that “there are now very few parties who do not acknowledge that the concept of a production peak is valid.” So what is “peak oil”?

It’s the notion that at some point the sources of petroleum in the Earth’s crust will suffer so much depletion that production must gradually grind down, spiking prices and putting a substantial crimp on oil usage. “Peak oil” would seem to be simply an obvious extrapolation from the idea of scarcity. “Few parties” deny scarcity.

Like the Laffer curve in supply-side economics, however, the relevance of Peak Oil Theory all comes down to timing. Are we quickly reaching that peak oil point? Is there any reason to believe we are there yet?

Not really. Take the assessment by William J. Cummings, an ExxonMobil spokesman: “All the easy oil and gas in the world has pretty much been found. Now comes the harder work in finding and producing oil from more challenging environments and work areas.”

The trouble, here, is what gets covers up: The almost certain-to-be-huge reserves to be found in less convenient places, like the deep ocean. Once perfected, techniques to retrieve deep-ocean oil will themselves come down in price, and the vast reserves we can expect to find (and are finding) will likely work to mitigate the “ever-upward” trend in prices.

And not all new sources need be in the deepest ocean beds, or the coldest Siberian plains. Higher prices have already spurred new exploration; new sources are now being prepped for exploitation. And these near-to-present supplies will likely affect prices. (When? My crystal ball is in the shop. Sorry.)

Several years ago, a year before the dot-com bust, a friend of mine heard a major speculator pooh-pooh talk of a downturn in the stock prices. “Prices will only go up and up and up.”

My friend came away from the conference with one word on his lips, repeated: “Sell, sell, sell.”

Not long after, NASDAQ collapsed along with much else. It couldn’t happen. And yet it did.

Normal cycle of boom and bust. Or boomlet and bustlet.

The same goes for oil. ABC’s Adam Shell may report that recent gasoline price rises were “unexpected” and qualify as somehow “unprecedented,” but we don’t need to buy into such ahistorical hype. Similarly, when all around you are saying the price can only go up, start thinking that the very opposite will happen. What goes up must come down.

Now, I am no economist. Peak Oil may make little near-term sense, and its predicted forces may have negligible effect on current prices, but Peak Amateur Econ Theory Metatheory tells me that I’m about to pass the point where my supply of meaningful things to say runs out. Still, one idea remains worthy to flag onto the main drag, if for no other reason than the application of a little common sense. (I have a mild addiction to that term, by the way, not merely because I like Tom Paine, but also because I have a multimedia commentary program called Common Sense — in which I usually stay closer to my area of expertise.)

Here goes: Every time oil prices have spiked in the past, they’ve gone down again. Often plummeting.

And let me do my journalistic duty and quote an expert, Cato scholar Alan Reynolds. “Marginal uses of oil become less and less attractive when the price goes sky high.” And this will have an effect. Has had an effect. Demand for oil in America is lower today than in 2004. And even in China, he says, high oil prices are starting to curb usage. (All those plastic products are made from good ol’ oil, and the profit margin on a lot of them is extremely thin. Costs go up? Production ceases.) Singapore production is down 6 percent.

Reynolds confirms every suspicion I’ve had that prices will fall. For every reaction, there is an opposite reaction? Something like that Newtonian idea governs economies, too. Prices rise, and demand falls, and prices then fall. If the price whoppingly spikes for a commodity like oil, a recession happens — as businesses and business projects fail in reaction to increased costs — and demand goes down, and so prices must go down.

“In the last three recessions,” says Reynolds, oil prices have “fallen by 44 to 76 percent in a reasonably short period of time. How does that happen? It crushes demand and to clear the markets the oil sellers have to accept whatever prices the market will bear.”

There you go. Very few trends always shoot ever upward. Same goes for gas prices.

Prices are rising, understandably, but they will go down again, almost certainly — perhaps even in the not-too-distant future. And by a substantial amount.

Before a recession, or after it? Reynolds claims you don’t need a full-blown recession to spur a price fall. Will prices rocket up to $7 per gallon, first? My crystal ball, once again, ain’t handy.

I’m not vying for a gig as chief prophet, just throwing a little cold water in the face of paranoia and panic. Yes, times have gotten tougher, and may get tougher still. But if the marketplace is left free to react, we’ll not only survive, we’ll flourish.