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April 18, 2005

Gas Prices Burn

The LA Times has an interesting article on the hit fuel prices are handing small businesses. Makes sense, particularly if your work has a roving component (gardener, pizza delivery, etc). Nevertheless, this strikes me as quite a non-story. Gas prices are higher, but not that much higher. We're dealing with an increase of around 30 cents a gallon (at least here in the Southland), seems to me that small business has larger fish to fry, it's just the LA Times that didn't.

It will, on the other hand, be pretty fascinating to see what happens when oil becomes really expensive, $4 or $5 bucks a gallon. Considering the lifetime costs of that, you're likely to see a lot of investments in new, more fuel-efficient capital. That means everything from hybrid cars to window insulation to white paint for your roofs (did you know that if LA painted its roofs white it'd save about 1,500 megawatts of power on cooling, or about 3% of California's Summer load?) to thicker copper wires (retain electricity better). Little changes that make a huge lifetime difference.

This is the sort of thing we did during the OPEC shock in the 70's, and we tore OPEC apart with it. Fuel-efficient cars (through CAFE standards), regulation mandating more efficient air conditioners, and so forth were all forced to market, all did better jobs than their gas-guzzling forebears, and all contributed to lifetime savings and profit increases for the companies involved. But we did our job too well, and Saudi Arabia decided OPEC had lost and so they flooded the market with super cheap oil, thus ending all need to conserve. And so we stopped conserving.

Oil prices aren't so high now that we're being forced to act responsibly, but they will be soon. And then it'll be interesting to watch us rise to the challenge -- many of these investments can be a long-term boon for small businesses, not to mention the economy as a whole. During the California energy crisis -- a man-made one -- there was an enormous scramble to bring more power capacity online. Huge amounts of money were invested, power plants forced into operation, and so forth. But by the time they hit the market, their capacity was no longer needed. Why? Because Californians had cut their power usage by 10% in a matter of months. They had created their own extra capacity and lowered fuel costs. So I'm not too worried about the small businesses -- today's bitching to newspaper reporters is tomorrow's conservation and capital investment. And we need that to happen.

April 18, 2005 in Economy | Permalink

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Comments

Word!

Conservation is much easier than conventionally thought. Especially if it is incented in any significant way.

The 10% pullback in electricity usage you mentioned was incented by rate rebates by the CA regulators for those who cut use below the previous year's level. It worked well, producing demand reductions almost immediately. Power plants take years to design, permit, and build.

Some well placed taxes on heavy vehicles (SUVs and pickups that are not required for employment) that chew up roads and guzzle gas, plus some tax deductions for high efficiency hybrids or bio-diesel would produce huge demand reductions (and a major cutback in the nation's current account deficit for imported oil.

The Dems should be all over this issue with proposals now since the public is listening. SUV sales are already down 10% or more from a year ago.

People will conserve when they understand it is in their economic best interest.

Posted by: JimPortlandOR | Apr 18, 2005 12:55:01 PM

I agree with the meat of this post but have to disagree with this:

"We're dealing with an increase of around 30 cents a gallon (at least here in the Southland), seems to me that small business has larger fish to fry, it's just the LA Times that didn't."

Today's data shows a US average price of $2.28 up about .50 since one year ago. That's about a 20% in fuel prices over 12 months. For any business where fuel costs are a relatively large fraction of operating expenses that's huge! (Imagine if your rent were to go up 20% a year with no raise etc. Where does the extra money come from?) Given that many small businesses (and large ones too) have a rather thin profit margin, this seems to me like a big deal.

Posted by: Scott Pauls | Apr 18, 2005 1:01:54 PM

Jimmy Carter was widely ridiculed for urging Americans to turn down the thermostats, drive with caution, etc. Thing is, (in a nutshell), his energy policy worked: By 1985, demand was so reduced that the price of crude dropped below $9/bbl. Then came the CAFE loopholes you could drive a truck--or, SUV, as they would be called--through.

Dick Cheney decried conservation as nice, but not the American way (my paraphrase). Since when was the word "conserve" not a part of "conservative?"

Posted by: jim | Apr 18, 2005 1:15:01 PM

The increase in gasoline prices is not yet the source of widespread discontent, but that may be coming soon. Prices usually go up in the summer. It hasn't been enough of an increase to drive people crazy, but it is noticeable to those of us who drive a lot of miles every week.

It's not a huge amount of money, but there is a psychological effect. For me, it's the $50 fill up. I notice it. I haven't yet reacted and I can't afford a new car right now, but if I were buying, it would be a major factor.

The problem in the Carter years, and in the earlier periods of gasoline price spikes, was not just prices, but shortages. Long gas lines, odd/even days and the like were a regular part of the evening news. It was a disruption to peoples' lives, and it was an image that suggested that the government was not in control.

As much as I like Carter, it wasn't his policies as much as it was rising prices that convinced people to conserve. I doubt that Americans will ever adopt conservation habits unless and until prices rise and stay high over the long term. We should have imposed a gas tax to keep the price up, but that was politically untenable.

[NB - I don't know about others, but I hate the phrase "here in the Southland." I am not sure where it came from, but I suspect it was local TV because the only people using regularly are on local TV. It grates on my ears and jars my sensibilities and if I had a real good explanation for why that is so, I would write it.]

Posted by: James E. Powell | Apr 18, 2005 1:42:53 PM

Ezra, it is a big deal.

In January of last year, it was $1.60 a gallon, now it's $2.60 That's 60% in a bit more than a year.

(see Scott Paul's comment)
Check the stats yourself:
http://www.energy.ca.gov/gasoline/

Posted by: Mikey | Apr 19, 2005 2:25:30 AM

Yes, it's a big deal because the shock of the increase. But the truth is we have merely gone from dirt cheap gas to somewhat less cheap gas. Would I have prefered a smoother transition? Undoubtedly. But the point is, we would eventually have to go to gas prices many times the amount it is now. Better to spread the pain over as wide a time span as possible.

Posted by: battlepanda | Apr 19, 2005 1:48:09 PM

I have to admit, I'm actually kinda grateful now that UCLA laid me off. That 50-mile round-trip commute from Glendale to Westwood would be burning a nasty hole in my pocketbook right about now, and there really was no good public transportation option. (At least, not one that didn't require two different buses.)

Now I work in Burbank, only 6 miles from home. Much less painful, gas-wise.

Posted by: Mnemosyne | Apr 19, 2005 6:17:12 PM

For anyone who cares about energy conservation, you will be pleased to know that effective October 1 of this year, California will be requiring the high reflectance roofs Ezra referred to. They are primarily useful on air-conditioned, uninsulated commercial buildings. More detail than you want to hear about is available in this pdf file. It's one of the passive techniques that works best when you really need it; on super hot days. Thanks belong to all the researchers and California Energy Commission staff who plug away on saving our butts day in and day out without much glory.

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