Like it or not, we live in a capitalist system that is usually guided by the rules of supply and demand. When prices go up, demand should decrease because fewer people would be able to afford a purchase at that higher price point. On the opposite end of things, when prices go down, demand increases because that good is more affordable and people buy it.
Pretty basic “Intro to Economics” stuff so far. But instead of buying less because the price goes up, that seems to not apply to gasoline and natural gas. When gasoline hits $5 per gallon (or actually $6 here in California), shouldn’t we be driving less?
The typical answer is that demand is not flexible in that we still need to drive to work, we still need (and are willing to pay) to heat homes with natural gas-fueled power stations or to cool them off with air conditioning. One cannot live in Las Vegas or Phoenix without the AC working through the summer, 24/7. Putting aside thermostat adjustments, fair enough.
In dealing with rising fuel costs, there has been a lot of talk about increasing supplies by opening up new areas for oil and gas exploration even though pretty much every area has been explored and documented at this point, and there has also been talk of temporarily reducing or eliminating the gasoline tax in order to help consumers with inflation that has taken hold in 2022.
There is a painful truth, however, that we need to learn to accept. The world is getting warmer. Much warmer. And if humankind is going to make it to the end of the century, then we need to severely cut back on what causes global warming: the burning of fossil fuels.
What we are seeing is a preview of what is to come and rather than trying to ease the pain for consumers, we need to come to the realization that we cannot continue to use fossil fuels at anything close to the current rates and still do something about climate change. In other words, prices have gone up and consumers then need to adjust their behavior accordingly by buying less, which in theory, would lead to a drop in price.
That price reduction might not come given that supplies of fuel are not limitless, either, though we are in better shape globally when it comes to natural gas as opposed to petroleum products. Still, there has to be a point at which people drive less simply because it’s too expansive to fill the tank. Those with bigger SUVs already know how shocking it is when the pump ticks over $100 at the gas station.
When Joe Biden visits Saudi Arabia in July, the president is expected to ask the Saudis to increase the crude oil production, again to increase supply and to reduce the price of oil. Regardless of what the Saudis say, their production has consistently hovered at 10-11 MBD (Million Barrels per Day) for years now. Why? They can’t pump out any more because they too, are starting to tap out. Though Saudi Arabia is a major global supplier, note also that their reserves continue to be the same even though they pump out 10 million barrels a day! It’s Penn and Teller magic.
Inflation throughout the entire system has been driven by the prices of fossil fuels. Whether directly in production (as in electricity demand) or in transit (those giant container ships lining the dual ports of Long Beach and San Pedro), everything goes back to energy supplies. Food production also must come to grips with the estimate that production of one calorie of food energy (technically, a kilocalorie) requires inputs of 10 to 14 calories of fuel energy. When energy costs go up, so does the price of stuff at the supermarket.
In a place like Southern California where public transportation is problematic, to say the least, maybe people do need to keep driving in order to go to work, school, and so on. But what we can do is to cut back on other types of consumption. We need to buy less. And maybe we will if prices stay high because energy inputs will stay more expensive as we start to run out of relatively cheap crude oil.
The secretary-general of the United Nations warned the world a few months ago that we are on course for a climate catastrophe if we do not change our behavior and cut back on our use of fossil fuels. It is doubly tragic that war can be waged in places like Ukraine and Yemen and we can ignore the waste of energy resources dedicated to the mass killing of human beings. Jet planes need fuel and so do tanks: Russian tanks use up about 0.8 gallons of fuel per mile. Add to this missiles and cluster bombs and all the other stuff used to fight wars and what it will take after the shooting stops to rebuild eastern Ukraine. All of this comes with energy costs attached.
Humanity needs to live in the 21st century and stop pretending that nothing has changed. The Intergovernmental Panel on Climate Change (IPCC) has said that atmospheric CO2 concentrations cannot exceed 450 PPM if we are going to keep global warming to no more than 2ºC (about 3.6ºF) above pre-industrial levels. Looking at the data from the Mauna Loa Observatory in Hawaii (see https://www.co2.earth) , we have been at around 420 PPM this year. We’re going to hit 450 PPM by around 2030, as the IPCC suggests, unless something changes.
Change it must. If one believes in the principles of supply and demand, think of where we are now as a test case. We need to cut demand, not increase the supply. There is no other way.