What If Gas Cost $10 a Gallon?
By Tom Ryan
Recently exploring what would happen if gas prices reached $10 a gallon, an MSN Money columnist predicted thousands of truckers going out of business, airplanes sitting idle, and scores of restaurants and stores shutting down. On the rise would be car-pooling, hybrid vehicles, inline skates, telecommuting, rooftop vegetable gardens, home cooking, recycling, and solar and nuclear power.
According to Todd Hale, senior vice president of Consumer Shopping & Insights, Nielsen Consumer Panel Services, at $10 a gallon, the average family’s gas bill would leap from 16 percent of its retail spending to about 40 percent. Consumer spending on eating out, apparel, electronics, and vacations would fall sharply. Businesses and farmers would be squeezed by rising costs of transportation, petrochemical fertilizers and plastics. Food prices alone could jump by a third or more.
Although Goldman Sachs last month predicted gas prices may rise to as much as $5 a gallon if the U.S. economy and dollar doesn’t improve, prices in the U.S. are nowhere near $10. But consumers are already clearly altering their habits as gas prices soar:
- According to the Transportation Department, Americans drove 11 billion
fewer miles in March than they did in March 2007, a drop of 4.3 percent.
It is the first time since 1979 that traffic has dropped from one March to
the next, and the month-on-month percentage decline is the largest since
1942; - A recent survey by the AAA found a rare year-on-year decline of one percent
in the number of people planning to travel this summer; - With national gas prices hitting $3.94 nationally a gallon over the Memorial
Day weekend, fuel demand in the U.S. has fallen sharply and is headed for
its first annual decline in 17 years; - A Nielsen survey completed in December – when regular gas averaged $3.06
– was already finding that consumers were looking to battle high gas prices
by combining shopping trips and errands (70 percent), eating out less (41
percent) and staying home more often (39 percent).
“The psychology has changed,” Sara Johnson, an economist at Global Insight, told The New York Times. “People have recognized that prices are not going down and are adapting to higher energy costs. It’s a capitulation.”
Discussion Questions: Do you think America’s love affair with the road has reached a capitulation point with rising gas prices? If so, how will this impact consumer spending? Regardless, what opportunities might retailers be missing that have resulted from the hike in gas prices?
This is an absurd projection. Gasoline is a commodity, and has an OPEC influence as well as the laws of supply and demand that will impact gas (and oil) in a constantly increasing manner that will decrease prices. We have seen this happen several times before during the first OPEC hits in the early ’70s as well as the market crunch of the ’80s. Gasoline is clearly being pushed by depreciating values of the dollar and investors who are creating a bubble of prices.
The Economist did an analysis that showed that oil would have to reach $135/barrel before it exceeded the relative (inflation adjusted) prices of the 1980s, and it would have to reach $150/barrel before it hit the price peaks seen in the late 1970s. Last time I checked, we weren’t far off those marks. So while $10/gallon seems outrageous, so does $150 a barrel! It’s all relative.
The problem with changing habits in the US is that in a lot of places our cities are not designed for anything other than cars. So while there may be some short term behavior changes, they’re not going to last unless the infrastructure catches up. It’s great to say you’re going to ride your bike more, but not if you have to take your life in your hands every time you ride because you have to share streets with a lot of car traffic.
First, if gas did hit $10 a gallon, the number of things affected would be much greater than simply driving habits. The cost of goods, for example, would soar. At some price level, change will be forced, not voluntary. Today, we are still at a point where for most (certainly not all) behavioral changes moderate the impact of the higher gas price. As in business, burning platform issues drive significant changes.
Fuel costs, more than consumer altruism, will propel a great leap toward retailing of local items. This will be true of fresh produce, dairy, and much, much more. We may even see a return to American-made blue jeans! While higher fuel costs will hurt consumers in the pocketbook, there is big potential for entrepreneurs to take advantage of selling local, no matter how “local” is defined.
Ten dollar a gallon gasoline will not stop, but will change American’s love affair with the car. This would put us on par with Europe which has been paying eight dollars a gallon for years. Cars will be used for commuting only by middle and upper management. Car ownership will change from individuals to employers. The greatest change will be the decline of the suburbs. People will need to live near their workplace. On the other side, we will see more people telecommute. This will reduce consumption and thus, costs.
“Will gas go to $10 a gallon?” is a question many of us are asking each other. The answer I’m hearing the most is that we will just suck it up and live with it. We would probably begin to make some changes and start lowering our standards to European levels–small cars, bicycles, alternative fuels, better trip planning. We might just have to proclaim victory in Iraq and simply take over all their oil resources for our own personal use. Consumers and voters may decide it’s time to tap into our own oil reserves in Alaska or [take] it from others. Regardless, we will find answers to the problem and overcome the short term discomforts.
Are these doomsday articles really news or fear-mongering? Expect riots at $10 a gallon by the middle class. Expect the U.S. political structure to change at $10 a gallon.
Economists quoted in the NYT last week said oil could just as easily retreat to $60 a barrel as increase to $200 in the next few years. Particularly if, as these articles seemed to point out, we are adapting to higher prices and driving less.
As much as “experts” say China and India are driving prices upwards, I would expect their demand to be influenced by record prices–just like the U.S. Hopefully, this is a speculative bubble, or…we are truly in for a new profound face of business–less.
The truth is, we don’t know what will happen in the future because we have never been there. However, in the present, with gasoline being $4.00 per gallon, most consumers are finding a way to make it work but not without pain and struggle.
While it’s become more painful to fill up the family SUV these days, in comparison to some European countries, U.S. fuel prices remain relatively low. But wage increases are lagging way behind the cost of living jump, so as usual, people of modest means are taking the brunt.
I hear two themes voiced by our national leaders on this issue–one vision is progressive and hopeful, and the other is regressive and (I think) regrettable.
The progressives view present energy economics as an opportunity to reexamine our present transportation and electric power infrastructures and to begin to invest in alternatives. Distributed solar power generation can lift a big chunk of our energy load, which would help soften demand for oil and slow price increases. Development of a hydrogen fuel infrastructure for vehicles (hundreds of thousands of filling stations would eventually be needed) could help convert our transportation system to one with near-zero carbon footprint or oil dependency.
In contrast, regressive voices call for greater and faster exploitation of finite oil resources, capital intensive nuclear and refinery projects and more aggressive policies toward oil producing nations. They seek to prolong our nation’s fuel consumption status quo, by bringing cheap gas to the masses, even if it means plundering our environmental assets and mortgaging our global good will. This is regrettable, because it consolidates economic power in the present at an untold cost to future generations.
$10 a gallon gasoline may seem like a crisis, but in reality it is an opportunity for our society to question and revise the wisdom of running our nation on petro-powered vehicles. Ours is ultimately not a globally sustainable system. Oil will run out in a foreseeable time frame (two centuries at most), and we will need most of what is left for raw materials–to make the plastics, medicines and other substances to supply a world with more than 10 billion consumers.
Einstein had it more right than he knew: Energy is matter. Every kilowatt of power we save today or generate using non-petroleum sources leaves raw material over for another plastic syringe or dose of anti-cancer medication for our great-great-great grandchildren. What could be more conservative than that?
This is not only about driving and our love affair with autos. The failure of leadership of BOTH political parties in the area of energy policy has brought us the unintended consequences of an ecomomy in jeopardy. We are an oil driven economy. Not just for fuel, but for packaging, plastics and thousands of other commodities.
We can reduce the demand for oil by shifting fuel sourcing to other alternatives such as Nuclear and Hydrogen Cell technology. Every state of the union address for the last 7 years promised resources and development. Members of both parties stood and applauded, then if you watched carefully, snickered at each other. We have had token effort at moving our dependence on oil, and worse blocked any means of increasing production in terms of new refinery capacity and new drilling. This would have at least bought us time to put new fuel technology in place.
I am with Herb Sorensen. Let’s throw ALL of the rascals out and put in honest, competent people. Note, I said competent, NOT political idealists. They will only make things worse.
I have a prediction and you will remember it. We will have another war in 12 months and it will be about oil resources.
Certainly we won’t be worrying about sprawl anymore–in terms of preserving green space, people will be looking to repopulate the cities and inner-ring suburbs so they can have the shorter commutes they need for mass transit, walking and biking to local destinations. We could actually see a reflowering of our urban areas over the medium to long term.
Add back in a preference for locally grown food and locally (or at least domestically) produced merchandise–particularly clothing–and we could see a silver lining to this dark cloud.
At the same time, I do see telecommuting expanding, particularly in the exurbs and rural areas–and maybe this will be the push we need to get the rest of those areas hooked up to broadband. At the moment, the US is fifteenth in the world–and falling–in broadband penetration per capita, and it takes much less energy to wire areas up than have people driving into urban centers.
What’s problematic, though, is how we manage the decline of the outer-ring suburbs. They’re in trouble now thanks to the foreclosure crisis, and they’ll need intensive retrofitting to be livable in an energy-dear world.
They said we can’t use nuclear. They said coal used too much carbon and we can’t use much of that. The said we can’t drill in ANWAR. They said that we can’t even estimate the reserves in ANWAR. The said we we can’t drill off the coast of California. They said that we can’t drill off the Florida coast. They said that we can’t put a wind farm off the coast of Massachusetts. They said said we have to use ethanol in our fuel. The answer to the problem is to throw “they” out of office before “they” start telling the doctors how to treat us.
Nikki makes a great and sobering point. In Atlanta, we unfortunately don’t have the best public transportation so our options are to alter behavior or suck up the increased costs. It’s unfortunate that we have to pay personally because we have not been more proactive about this situation.
I’m with Herb that that there are big business and government pressures that prevented this proactivity–but how sad! In Brazil, they have a slew of gas efficient vehicles that all run on either ethanol or gas and folks can only drive 4 of the 5 workdays. Back in 1996, my Honda CRX was getting well over 50 miles to the gallon. The car was later taken off the market. We have options…our businesses and government have simply not pursued them.
Americans will not lose their love for the road. It’s still cheaper in many instances than flying. What Americans will do is retrench…evaluate the waste in their lives! Driving 25 miles for lunch and dinner every night, making multiple trips to stores every week vs. one a week, recycling and saving resources, carpooling….
Gasoline is not the only problem; electricity in most states has also had a dramatic increase. We are now a society of a TV per room; turned on or not, it takes electricity. We as a nation have had it “rich.” It will now be time for us to learn a little about conservation and ecological responsibility.
Opportunities for retailers include:
One stop shopping sales;
Recycling and energy (products that enhance these efforts);
DIY products – bread making, gardening kits, entertainment at home ideas….
As soon as the public makes the connection between governmental interference with the energy markets, retribution on the government will be swift. The greens are playing “Jimmy Carter” games and will pay the same price he paid. Witness what is going on in Europe presently, with throwing out the bums who lie about the checks they are writing for society to pay, based on their speculations about future problems. We used to stone prophets. Now, our only recourse is the ballot box. Unfortunately, the poor are typically the last to figure out who is doing it to them. I don’t think the press will be able to hide all of this long enough to achieve THEIR political goals. :>)
Perhaps it’s a simplistic way of stating a complex problem by asking what if gas cost $10/gallon.
Why?
Because the price of crude isn’t the only barometer spinning out of control.
The cost of health care insurance is estimated to double in the next 5 years.
So.
Now the question becomes what if gas cost $10/gallon and your health care premiums are double what they are now.
Been to the supermarket lately? Prices seem to be rising with every visit.
So now the question becomes what if gas cost $10/gallon and your health care premiums are doubled and the price of groceries put on the family table is up by 30%?
Have you ever seen a year when the cost of college tuition hasn’t increased?
Add increase tuition expenses to the above what if question.
Etc, etc.
The question ultimately becomes what if the cost of living exceeds your means?
This will be a reality sooner or later. However, as many have commented above, the US is not well equipped to change. American cities are basically office parks with tall buildings and sports venues. Rather than be open to change, the majority of the population will fight to lower taxes, insist on the development of nuclear energy, and buy more and more hybrid cars all the while thinking they are doing their part to clean up the environment. Recycling and organic will be the next fad like the South Beach and Atkins diets. In the end, little real change will be made. This means that prices for basics like food and energy will continue to rise and the vicious cycle will repeat itself.
Too much would have to be sacrificed to mold America into the European model. Europe is what it is because of its medieval roots and two devastating world wars. With nothing that extreme expected in the US, it looks like the US standard of living will surreptitiously decline.
America imports about half its oil. Many countries import all their oil. Compared to those places, America is petroleum-rich. And America still has huge natural gas reserves, all of which could be used to power autos and heat homes. Honda sells natural gas-powered cars (the Civic GX) in a few states (see http://automobiles.honda.com/civic-gx/ and Ford used to sell natural gas taxis. Converting a gasoline car to natural gas is trivial. Homes with natural gas could fill automobile tanks using the device endorsed by Honda.
Very little oil is used to generate electricity in this country, but that quantity could go to nil if nuclear power plants were authorized. America has plenty of nuclear fuel. The majority of electricity in France comes from nuclear plants. America could stop burying oil in the Strategic Petroleum Reserve, and use that oil for worthwhile purposes, instead. The SPR has 700 million barrels of oil.
So there are practical alternatives to $10 oil, besides the obvious political changes already discussed.
All great comments above. Reinvention will occur when the marketplace provides options for consumers that are more attractive than their current methods and needs. Cell phones replaced land lines, calculators replaced adding machines, and alternative fuel sources and transportation will replace current methods used by consumers. The tipping points are always centered on cost and convenience. We’re past the cost tipping point in the mind of many US consumers, so differentiated transportation alternatives are soon to follow.
What a shame it would be if gas went that high because I really love corn on the cob. But there won’t be any left since it will all go towards making fuel. Then the government would need to subsidize money so that every non-hybrid can be converted to burn this new fuel–oh, wait…we need that money to save OTHER countries. Kind of reinforces the points several of my colleagues have made so far, doesn’t it?
Not to be too political, but, if our leadership would’ve taken the opportunity to guide us off “the juice” say, the day after 9-11, we wouldn’t be in this boat. Lack of foresight can be deadly, as we’ve clearly wasted billions of dollars and lives on the wrong goals. Enough said.
But having said it, I don’t think Americans will ever lose their “love of the road.” We’ll just all be driving new vehicles…SOMEDAY…someday soon.
You don’t have to look very far to see how the next generation has taken “being there” to a whole new level of internet interaction and socializing. As more of the economy “goes virtual,” the need for transportation services and to be physically present will decline.
Another aspect to this whole thing may be retail businesses rethinking how they materialize in the future. Instead of each retailer having their own outlet with the accompanying operating costs and delivery expenses, it makes more sense for retailers to offer their products as part of a larger facility. Just as many retail stores used to lease out departments, it makes sense for retailers to lease space in a larger facility that could reach all the way back to the distribution center. This way a retailer could be serviced from a shared storage facility, with product commingled on a delivery, while sharing the common retail presence.
By sharing storage, transportation and physical operating costs, retailers can focus on differentiating themselves through private label products and extraordinary service. What a great time to be a consumer.
The real issue is that our cities are not built like European cities and are not convenient to accept bicycles and alternative forms of transportation. Because we have a need to travel longer distances, radical innovation is needed in alternative sources of energy–electric, solar, wind, water powered vehicles, etc.
Short term, we will see a wave of retailers go out of business, travel decrease and air fares skyrocket. People are pulling back now on their spending, but when gas reaches $4 a gallon, another threshold will be reached and people will pull back more. We need to trade our SUVs for subcompact cars, and I wouldn’t want to be an SUV manufacturer right now.
I will not believe that the middle-class is hurting due to rising fuel prices until I see the Soccer Mom in her massive SUV SLOW DOWN a little bit on the interstate!
In my Nissan Altima, I get around 30 mpg if I drive at 60mph. These people pass me in the baby-hummers, the Escalades, and the Tahoes like I’m standing still!!
That being said, retail that relies on expensive trucking may be in trouble. Anybody think that rail will make a comeback? 😉
The future. What a place. People are resilient and they will find ways around adversity. I think more people will work from home then ever before. That has compensation written all over it. More family meals at home together. More help needed for the poor and the effect higher energy has on food. Our houses will get smaller and we will spend more time together. The lower amount of disposable income, the slower the World economies and the less oil used.
To the earlier point, predictions are just that. I believe that the oil market will crash and lower prices are coming but not until more Americans invest in family and not their spending habits.
How is that for a silver lining?
We have reached one threshold in gasoline pricing, causing consumers to cut back on driving and spending. If gas prices continue to rise, we will reach other thresholds, each altering typical consumer behavior. As gas prices rise, consumers will continue to cut back on travel and discretionary spending, while increasing ridership on public transportation and carpooling.
It will be interesting to see at what point consumers turn to the Internet to do more shopping–not only will they save on driving to buy an item, they might get free shipping, and may not have to pay sales tax.
It is great to be a futurist; no one holds you accountable for what you predict.
When Edison developed the light bulb I wonder what all of the candle makers said. Today it’s a much brighter world than it was before the light bulb.
I can make a prediction since no one will remember it 2 weeks from now. I predict that Americans will never lose their love of the road. Yes things will change and we will have short term discomfort but we will find new ways to produce energy and use it more wisely. At $10.00 or even $5.00 a gallon, alternative energy is now more profitable; look for the wave of innovation.
Your petrol is cheap! If a gas station had your prices here in Norway there would be chaos as everybody would think this was just a fantastic offer.
In Norway where we pay over 13 Norwegian kroner (about $2.5) pr liter (yes, not gallon), we complain a bit but we still eat, live and drive!
What value fuel rises to, or drops to, in the future is anyone’s guess–at best. I am more concerned with the masses of non-college educated, two income families with kids and paying for day care, etc. I have a suspicion that as fuel prices have increased quickly, many people are alleviating the pain in a combination of ways. Some cut back spending. Others put off purchases. But fuel to get back and forth to work and to other essential services where no viable alternative exists is a looming storm cloud.
Just speculating here, I wonder how many people have just increased their credit card debt load while complaining when filling up and can’t or don’t make substantive lifestyle changes? Certainly, if we pay for fuel with credit at the pump, it is harder to “feel” the true impact of rising fuel prices. If fuel was sold, cash only, it would be a different picture, I’d bet. So perhaps the crisis to be concerned with is not fuel prices but increasing personal debt for all things increasing in price.
Based on the current trends, it appears we can assume disposable income to drop. Based off this assumption, we could prognosticate that the “average” US consumer will reevaluate their consumption patterns.
Relative to other developed economies like Canada and Northern Europe, Americans rely far more heavily on branded merchandise. This bodes well for low margin businesses like private label manufacturers. Even more so, retailers will start to gain leverage over their suppliers in this new battle for the customer. Retailers like H&M, Wal-Mart and IKEA who have established an image of offering Everyday Low Prices will be able to grow their market share provided they focus their attention and resources on providing the customer with value at the expense of everything else.
It will be interesting to see the evolution of the new Von’s small format supermarkets here in Southern California to see if this hypothesis holds.