The New National Pastime

At last year’s Memorial Day BBQ, the talk surrounded the slumping Yankees and a housing market that was beginning to show significant signs of distress. But this year was different…no talk of baseball, houses and barely a whisper about the endless primary season. Almost everyone at the BBQ spoke extensively about gasoline prices---where they were the highest, lowest and the outlook for the future.

I listened for clues as to whether people were changing their habits as a result of $4+ per gallon prices at the pump and was pleasantly surprised. A number of the attendees noted that they were taking public transportation more often and many of the soccer moms and dads are now trying to coordinate carpools for kids’ activities. Even my sister, a slave to her massive SUV, is considering scrapping the big car for a more efficient one. The data confirms the BBQ chatter—according to the Federal Highway Administration, the amount Americans drove fell 4.3% in March compared with a year earlier, the first time driving has fallen since 1979. But there is more to the price spikes than US consumer behavior.

While the US consumes a massive amount of energy, our use alone can not account for the price of oil more than doubling in 18 months, or for that matter, the six-fold rise in the past seven years. We already know that the biggest driver of new demand has been emerging economies, whose entry in the global economy has created a new consumer. What you may not realize is that the rules of economics do not apply in many of these places. A quarter of the world’s gasoline consumption is subsidized and in terms of population, half of the world uses energy subsidies.

That means that even as we change our behavior here in the US, energy consumers in China, the Middle East and Russia, have no incentive to make similar types of shifts because much of the cost increases have not been passed on to consumers. These subsidies have artificially raised inflation in the developed world through artificially high oil prices and suppressed inflation in the developing world, where inflation would have been even higher in the absence of subsidies. The net result is that the customary forces of supply and demand have yet to play out on the world stage. The good news is that the situation is unlikely to remain indefinitely. As fiscal pressures mount, some countries will be forced to incrementally remove these subsidies. The net result should be lower energy prices for the globe. Until then, however, expect to hear more about gas prices on the BBQ circuit.