Bad gas or hot air?

Last week, oil hit $100 US, which is to say Alberta's petro-cowboys were yippy-eye-yaying through the streets and Canadian motorists were cursing at the pump. Whenever oil rises, pump prices often follow, and, like clockwork, so does the moaning and groaning of the average consumer. When you ask most angry motorists what they believe to be the reason behind pump price increases, you get one of two responses.

The common response you get from Big Government-hating Westerners is that "the government keeps raising the taxes" or "it's all because of Mulroney and his damn GST". If you talk to Eastern lefties it's all about Big Oil collusion. "Why else does gas go up right before a long weekend?", they ask. And if you ask the West Coast hippies, they could care less, because they just cycle everywhere.

I got the feeling that gas prices must follow basic supply and demand laws, and that maybe gas is not as expensive as we think it is. So I decided to do some research.

If you look at the price of gas over the last 20 years, you would be forgiven for assuming it's only going to get worse. It starts out around $0.50/L in 1987 and ends up at $1.05/L in 2007. And for the Westerners out there, the tax theory seems to hold up at first, as average taxes on Canadian gasoline rise from 18 cents in 1987 to 33 cents in 2007. However, if you adjust all these values for inflation, using constant 2007 dollars, you find that taxes have stayed remarkably constant, while the price of the fuel (pump price minus taxes) has risen from $0.50 to about $0.70 in 2007$. So if taxes aren't pushing up the price at the pump, what is?

Turns out that if you compare the graph for fuel price and that for oil price in the same time period, all adjusted for inflation, they look nearly identical. If you compare the changes in each value over time, you find they have a correlation of almost 1, meaning they are very closely linked. This makes intuitive sense if you think about it.

Since the price changes of Canadian oil are very similar to American and European oil, data provided by the American Energy Information Administration help us see how pump prices would have likely changed over time in Canada further back than strict pump price data allows.

Turns out that while we are living through a period of relatively high pump prices, in constant dollars, we are not yet where are forebears were in the late 1970s and early 1980s. For that to happen, oil will have to hit $125 US.

Now how does any of this prove that pump prices are not the result of oil company collusion as so many claim? It doesn't. What it does show is that oil prices were abnormally high during two periods of low supply. In the late 70s it was due to crises in the Middle East, namely in Iran, and supply stoppages by OPEC, and now it is due to...yup, crises in the Middle East.

The fact of the matter is that oil prices seem to follow basic supply and demand curves, as far as my non-economist self can tell. Furthermore, the danger in applying simplistic and conspiratorial explanations to a complex problem is that it distracts us from the real issue: energy gluttony.

The real reason oil prices are rising and will continue to do so, is that the world is nearing Hubbert's Peak, the point at which the rate of oil production peaks, after which production rates progressively decline. In fact, many pundits state that we're already there. So, every barrel of oil is becoming more and more expensive to produce because it's becoming harder and harder to find. So supply is low, therefore prices rise.

At the same time, demand is huge, and growing every day. Even in the face of slam dunk evidence that human activity is contributing to drastic global climate change and ecological catastrophe, humans continue to consume massive amounts of oil-based resources. The USA is the largest per-capita consumer of energy in the world, and they don't seem to be slowing down. The problem is that they are living in a nation with some of the cheapest gasoline in the world, so price increases in world oil do not generate full impact there. There is no incentive to change behavior because the pressure has not reached the point where it induces such change.

As long as we hide behind explanations that put the blame on government and oil companies, we will fail to see that the real reason gasoline is getting more expensive is CONSUMERS. I always love watching the guy at the pump on the evening news complaining how expensive gas is for his 4x4 Escalade that he drives 2 hours every day just so he can feel like more of a man and live in the safety of the suburbs. Or the young guy at the pumps bitching about gas prices who then peels out of the parking lot and continues to do so at every successive intersection, hastening the depletion of his newly filled tank.

If you want the price of gasoline to drop, or you want it to affect you less, make changes. Instead of putting the blame on nameless, faceless sources, ask yourself how you are involved in the supply and demand chain. Even if your behavioral change doesn't end up affecting prices, it will still help line your wallet. And we all like a little extra cash.