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Charles Hugh Smith

Charles Hugh Smith

Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global…

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Is Gasoline Set to Double in Price? Why do So Few People Seem to Care

Is Gasoline Set to Double in Price? Why do So Few People Seem to Care

Human beings resist change until there is no other choice, and then they adapt and habituate rather quickly.

Human beings are remarkably adept at short-sightedness and denial. 100,000 years of adapting to the roaming, nomadic hunter-gatherer lifestyle rather naturally led to a mind and awareness attuned to satisfying present-day needs and exploiting near-term windfalls (a tree loaded with ripe fruit, etc.).

In the hunter-gatherer worldview, the future would take care of itself; the group cycled through its usual collection areas, and if these were barren, then it moved farther afield. In this fashion, homo sapiens colonized the entire habitable (in terms of hunting-gathering) planet in a series of migratory waves out of Africa.

Flash forward to the present and the notions that gasoline will someday cost $9/gallon, Medicare/Medicaid will go broke and credit-money will no longer be abundant and cheap to borrow. No matter how rational the case for these futures may be, the vast majority of humans have taken no actions to hedge or adapt to these potentially radical changes.

Medicare/Medicaid Costs

The present is the perfect guide to the future, until it isn't. Then we change.

We see this in others all the time. If you check the medical history of that fitness-obsessed "health nut" who only consumes organic produce and who has gotten the no-sugar/no-fast-food "religion," quite often you will find the person had cancer, and these radical lifestyle changes are the result of their wish to continue living.

No matter how many times people are adivsed to change their lifestyles to avoid some future sentence of doom, they ignore the admonishments and cajoling until they too are faced with a simple choice: change or die.

Thus there is little point in advising people to prepare for $9/gallon oil or to eliminate sugars, packaged fake-food and fast-food from their diets; they won't modify their behavior, identity or understanding of the world until there is no way to continue their current path.

Many observers seem to forget how quickly humans can adapt and then habituate to radically different circumstances. Prisoner-of-war camps are one dramatic example, but there are many other examples of widespread adaptations which occurred almost overnight.

One example still in living memory is the 1973-74 "gasoline crisis." The 1973 Yom Kippur War in the mideast triggered an Arab oil embargo of the U.S., retribution for having aided Israel in the war (ferrying replacement fighter jets across the Atlantic via hop-skip-and-a-jump from one U.S. aircraft carrier to the next, etc.)

As a result, oil not only quadrupled in price but widespread "topping off" led to shortages, and panic-stricken Americans queued their gas-hog vehicles in long lines at gas stations. I myself arose at 5 a.m. to get to the nearby station as one of the first in line; I did homework until the station opened around 7 a.m.

In response to this madness--the nation's entire storage of gasoline was quickly exhausted by the "topping off" of tens of millions of gas tanks, and millions of gallons of fuel were squandered inching forward in lines--the Federal government instituted a simple "odd and even" rationing plan: if your license plate ended in an odd number, you could get gas on certain days, and those with even numbers got petrol on the other days.

The panic-stricken lines instantly vanished. Scarred by this sudden exposure of vulnerability, the government instituted other longer-term changes: it created the CAFE mileage standards for autos and mandated major improvements in the energy efficiency of appliances.

As a result of the last big oil discoveries of the century in the 1960s-early 1970s (Alaska, North Sea, etc.), oil and natural gas have been cheap and abundant for decades (with a brief spike in the summer of 2008 just to remind us that fossil fuels have a nasty habit of doubling every now and again without warning).

Now that even the Pentagon sees Peak Oil hitting by 2015, you might think Americans might be looking ahead a mere five years and pondering another quadrupling of oil and the first real shortages in 40 years. But nobody cares other than a handful of "doom and gloomers" (like me, heh).

So nothing will happen of any consequence until the present path become impossible: that is, when oil rises from $80 to $320/barrel and gasoline is $9/gallon, even after the government removes the excise taxes, and widespread shortages occur.

The 1989 Loma Prieta Earthquake collapsed the key 880 freeway and closed the San Francisco Bay Bridge for months. This vital artery in and out of San Francisco carries far more traffic than the more iconic Golden Gate Bridge, and on the face of it the closure should have been more than an inconvenience--it should have been a body-blow to the local economy.

Yet people adapted; the regional subway system BART went to a 24-hour service with additional trains, superfluous trips via other bridges were curtailed, and the region went on more or less as before. Once the bridge was repaired and re-opened, then they just as quickly resumed their old habits.

People adapt to changing incentives and disincentives.

There is no point in cajoling people not to waste food; food is incredibly cheap in America, and those of us who dumpster-dive see the evidence every week: tons of perfectly good food, frozen, canned, fresh, etc. is routinely tossed out.

Quadruple the price of food and less will be wasted.

Until that happens, food will be thrown away in quantity, despite all the whimpering about "the high cost of food." When things truly become dear, there is no waste, period.

An incredible amount of "low-hanging fruit" could be harvested in terms of the energy squandered in the U.S. Perhaps the most egregious example is the electricity needlessly consumed by hundreds of millions of "zombie" electronic devices on stand-by. This amounts to 5% of total U.S. consumption of electricity: the total used by the 15 million residents of Greater New York or Greater Los Angeles.

(We switch off the power strips to the TV, DVD player, etc., when the devices are not in use.)

Yes, 5% of the electricity consumed by the nation is 300 million people X 5% = 15 million. In effect, the power consumed by a vast megalopolis is wasted. A 50-cent power-management chip would instantly eliminate most of this waste, yet no manufacturer will add this 50-cent part until the Federal government mandates it.

This is The Grand Failure of the Market--a topic I address in Survival+, along with the Grand Failure of Government Manipulation of the Economy. You might think this is contradictory, but common-sense reveals that some management of The National Commons and long-term issues is necessary, as neither the costs borne by The Commons or long-term issues have any bearing whatsoever to "the market."

"The consumer" will never demand a reduction in zombie electrical useage because the consequences are so marginal on the household level, even as they are stupendous on a national/planetary level.

"The market" will price gasoline at $3 and then reprice it at $9/gallon without any delays for recalibration or adaptation. It falls to the Central Government (hopefully a competent one) to mandate that we as a nation can no longer waste enough electricity to power a city of 15 million people just because electronics manufacturers see no "market benefit" to adding a 50-cent power management chip to their products.

Were the supply of oil available to the U.S. to drop in half from 19 million barrels a day (MBD) to 9.5 MBD over a relatively short period of time, chaos need not ensue. I can easily imagine simple rationing plans modeled on World War II-era rationing being put in place.

Imagine if rural households were allotted 100 gallons a month and urban households 50 gallons (insert your own numbers--these are used for illustration purposes). Those households which consumed less would be free to sell their "extra" rations on the open market. This would provide major incentives to conserve. Those who needed more would have the choice of paying a premium for the extra rations set by the market.

The price of both the gasoline and the ration chits would be left to the market. If gasoline tripled, then that would also provide an incentive to conserve.

To take but one example: take four people who each drive to work in separate cars. Now incentivize car-pooling via a tripling in the cost of gasoline and rationing. Three leave their cars at home. Savings: 75% of pre-rationing/pre-"crisis" consumption.
Add hundreds or even thousands of other ways to reduce consumption and then multiply by 150 million people.

Percentage of obese US Adults

Some two-thirds of Americans are overweight or obese, and as a result many are suffering from chronic "lifestyle" illnesses. Americans in general eat too much low-quality, high-fat meat. (Please see Food, Inc. (film), King Corn (film) and Super Size Me (film) for more on this subject.)

It takes about 10 pounds of grain to produce one pound of (generally low quality, high-fat) meat. It takes several barrels of oil to raise the grain.

Rather obviously, a monumental reduction in energy consumption would be effected by a reduction in meat consumption (and a reduction in food consumption in general). The same can be said of frozen food (huge energy consumption to manufacture, ship and store) and junk food (high cost, near-zero nutritional value, etc.)

I have no doubt that oil consumption could be halved. After the initial period of panic and "the sky is falling" pronouncements, people would adapt to the new incentives and disincentives, and then quickly habituate to the new realities.

It's in the genes to waste when there is cheap abundance, and to conserve when things are dear and in short supply.

Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global finance, stocks and political economy. He has written six novels and Weblogs & New Media: Marketing in Crisis and just released Survival+: Structuring Prosperity for Yourself and the Nation.




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