High gas prices leading the way to independence from OPEC and crude oil?

On March 9, after 39 days of increases, the national average price of gasoline was $3.758 per gallon. Sixteen days later, it was $3.894 and climbing. Today, it teeters near $4.

Is it possible rising gas prices could actually be a good thing?

“What’s good about high gasoline prices is it sets in motion the market forces that will cause gasoline prices to fall,” said Christopher Thomas, an associate professor in the College of Business Administration who holds a doctorate in economics. “When it goes up, two valuable things happen: consumers will buy less gasoline and some of them; will make permanent changes in their consumption behavior. They will get rid of their gas-guzzling cars and switch to more gasoline efficient cars.”

Thomas said this will not just help today, but in the future in reducing the demand for gasoline, which creates a downward pressure on future prices.

And that’s just on the demand side of things.

“Producers, when they see higher gasoline prices, they want to add to their capacity to produce gasoline,” he said. “So rising prices cause both an increase in supply and a decrease in demand. That’s a good thing.”

Another good thing, Thomas said, is that rising prices of gasoline will force us from fossil fuels to alternative fuels, such as natural gas.

In fact, in March 2012, GM and Chrysler announced they will soon sell trucks that run on both natural gas and gasoline. Thomas said this wouldn’t be happening without the rising prices of gasoline and the falling prices of natural gas.

Photo source: Consumer Reports

Thomas said the benefits to natural gas are that it is cleaner than the dirty coal that is used now, and is very abundant and cheap.

“We have a 100 to 200 year domestic supply,” he said. “All the natural gas we’ll ever burn, we don’t have to buy one bit of it from foreigners. Domestically produced, it is very cheap.”

Thomas said the gasoline equivalent is 75 cents to $1 a gallon. The reason we have not been accessing it already is the technology is just now being discovered and implemented.

“It’s going to change the nature of our energy markets substantially within the next few years,” he said. “We’ll be much less dependent on OPEC (Organization of the Petroleum Exporting Countries) and much less dependent, I might add, on dirty coal.”

Thomas said when oil companies drill for crude oil they also find natural gas.

“As we say in economics, the marginal cost is zero,” he said. “The cost of taking the natural gas out is a big fat zero, so even if the price is low, it’s still above the cost.”

Thomas said it is also necessary to consider the potential of natural gas because of the ongoing tensions in the Middle East and the price of crude oil going up.

“You still need crude oil for some things,” he said. “But natural gas can replace crude oil for many things, and in time, and this is where the complexity comes in, the ability to substitute natural gas for crude oil grows increasingly easy to do. Two years from now this will be commonplace.”

One thought on “High gas prices leading the way to independence from OPEC and crude oil?

  1. Pingback: High gas prices leading the way to independence from OPEC and crude oil? | Rebecca Forman

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