High Gas Prices Force Oil Re-think

On June 6, 2008 crude oil futures at the New York Mercantile Exchange (Nymex) jumped a record $10.75 to finish at $139 per barrel (per/b), a level which was also a historic high for the commodities exchange. Meanwhile persistently high gasoline prices at the pump – which have now reached a national average of $4 per gallon – are beginning to have an impact on American domestic oil consumption habits and on attitudes towards oil-producing countries.

Although the cost of gasoline is about half of what motorists pay for transport fuels in Europe – because of much higher taxes –signs are emerging that Americans are beginning to think twice about their traditional love affair with petroleum, and resentment against countries that “have the oil” is becoming prominent in the media and in the pundit world.

With the flow on effect of high crude oil prices pushing up the price of gasoline, the economic and psychological impact on the American consumer was bound to kick in at some stage.

Indeed data from the US Energy Information Administration show that year-to-date gasoline demand in 2008 has been slightly down compared to last year. The agency also forecasts that petroleum demand this year will decline slightly compared to 2007. If this proves correct it will be the first annual decline in US oil demand since 1991.

The impact of high oil prices on US petroleum consumption so far is very modest, but the signs of changing attitudes are there. This is significant because the US is the world’s largest oil market – Americans consume about 20 million barrels of oil per day which is nearly one in four consumed around the world every day – and consumer interest in fuel efficient vehicles such as hybrids is increasing, as is usage of public transportation in major American cities.

A reflection of this were the decisions by General Motors in early June to shut down four SUV plants in North America and to consider selling the Hummer model because of poor sales. Gas-guzzling cars are out and stickers saying “Osama loves your SUV” abound. Meanwhile “patriotic” green fuels and fuel-efficient vehicles are in. When country singer Willie Nelson goes on the road for a tour these days he does so in a biodiesel fuelled tour bus.

The policy climate is also changing. Last year congress was able to pass legislation that raised fuel economy standards for vehicles – the first such increase in more than thirty years. In contrast, when a similar attempt was made in Congress earlier this decade to do this the proposal was defeated, and criticized for being an “assault on the American way of life.” But back then oil prices were $20 per/b.

Furthermore, high oil prices are also putting strains on the US’ decades-long relationship with the largest oil producer in the world, Saudi Arabia.

Indeed high oil prices have stirred up hostile attitudes to oil producers, particularly in the Middle East. Democratic Party legislators have demanded that President George Bush suspend increases in arms sales to Saudi Arabia unless it produces more oil to cool prices.

But with big Middle East suppliers such as Saudi Arabia primed to supply the rapidly growing Asian oil markets, the kingdom and other oil producers in the Persian Gulf do not feel compelled to listen to an American president when he pleas for the Organization of Petroleum Exporting Countries (OPEC) to increase output.

OPEC is a rhetorical whipping boy in Washington when oil prices are high, but with Saudi Arabia and others forging closer commercial ties with China, India and other Asian economies these petro-states can shrug off criticism in the knowledge that they have growing markets elsewhere to supply.

As a result US leverage over the oil policies of OPEC states has become diminished, as reflected by Saudi Arabia’s mute response to George Bush’s request to pump more oil during a recent trip to the region.

High oil prices are changing the way Americans think about oil, and the countries that produce it, in a way not seen since the oil price shocks of the 1970s.

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