Gas Prices and HSR

As expected, gas prices have begun falling. I will admit I did not think this would start until after Labor Day, as the fall is usually when the declines occur. But it began in July, and now we have some folks in the comments crowing that this means the crisis is over and HSR is no longer necessary.

If only.

Gas prices are on a long-term trend upward. As with any "trend" in economics there is typically a great deal of fluctuation along the way, with price spikes and price collapses. But as this chart from Chris Vernon at The Oil Drum shows, the trendline is quite clear:



30% year over year increases since 2002. As energy analyst and friend of California High Speed Rail Jérôme Guillet explains, the fundamentals still point to a long-term increase in oil:

One point that needs to be made again is that demand destruction in the US (or even in Europe, where it is hapoening too) is not enough on its own to bring prices down, because it needs to be larger than the supply growth in the rest of the world to limit the requirement for further demand destruction and price rises, given that production is still largely stagnant. And the problem is that demand is not growing just in China and India, thanks to rapid growth, it is also growing massively in oil producing countries themselves (Saudi Arabia, Iran, Russia, Venezuela), which often subsidize gas and which can afford it given that they have a natural hedge against (the subsidy gets bigger when oil prices are higher, ie when their own income is bigger, and the income growth is larger than the subsidy growth for those that export any volumes).

The phenomenon of peak oil is what's at work here, and it helps explain what's going on. As the supply of oil peaks, it becomes more difficult to boost production to satisfy growing demand. The price of oil will rise unless supply matches it - which as peak oil demonstrates, it can't - or demand will be destroyed. Demand destruction is good, but only if it happens through the provision of sustainable alternatives. Without alternatives to driving or flying, demand destruction is merely destructive, throwing economies into severe recession as people must reduce their oil consumption but cannot turn to anything else to make up for it.

What happened recently is that for various reasons in early 2008 - concerns about war with Iran, the declining dollar, and perhaps some speculation, the price of oil rose above the trendline. Now we're seeing some of those pressures ease and the price is starting to fall, especially due to evidence of demand destruction in the US. Problem is, if people start upping their gas consumption, prices will resume their upward march. The only solution is long-term demand destruction.

But it's STILL above $4 in most of California. And that's still far too high for most people to afford. It's been my belief that $3/gal was the true tipping point - when that price was reached and sustained for the first time in California, in 2006, the housing bubble began to collapse. And the downturn began in the places most dependent on cheap oil - exurbs like Modesto, Moreno Valley, Stockton, etc.

Jérôme goes on to explain what is really needed to deal with high gas prices:

In fact, I'll say again that our energy policies should focus on one thing first and foremost: demand reduction. Any reduction in demand that we manage in excess of what market forces would (precisely) force us to do will get prices down, and will save us a lot of money - and the smartest demand destruction is the permanent kind, that brings savings every month and every year rather than one-offs like giving up a trip.

We have to reduce our demand. Let's do it in an organized way rather than a panicked, haphazard, inconsistent way. And that's where government can help, by providing longer term pespective, informing citizens, pushing infrastructure in the relevant direction, and bringing up standards that apply to all equally and guide individual behavior in the right (Energy Smart) direction.

Price mechanisms work, but they are brutal, hurt the poor the most, and cause unnecessary disruption to economic activity, and pain to many. And they are fickle, as the current volatility (which, as I explained above, is likely to remain) causes rapidly changing signals which prevent decisions from being taken.

High speed rail is one of those long-term solutions that will provide "good" demand destruction - the provision of alternatives to oil that enable economies to grow and people to move around. We don't support HSR because gas prices spiked in 2008, we support it because gas prices are on a permanent, long-term increase, despite whatever intermediate fluctuations occur - and the only solution to this that saves us money and sustains a prosperous economy is non-oil mass transit like high speed rail.

In the summer of 2004 gas prices soared to the record level of $2.50 in Seattle, where I was living at the time. By January 2005 it had dropped to $1.95. But that didn't change the long-term upward trend, and so in summer 2008, in both Seattle and California, gas prices hit $4.50. We may see $3.50 or even $2.99 by the November election, but the next increase always wipes out that savings. Next summer may well see us break the $5 barrier (diesel already did so this year). Three steps forward and one step back is still forward movement.

So to those who point to $4.15 gas and say "neener neener," the joke is unfortunately going to be on you when we hit $5 in 2009. I don't know about you all, but I'd rather we got to work building high speed rail so that we have an alternative to oil sooner, not later. We've already wasted three decades. We have no more time left to lose.