Blame High Gas Prices on Laziness and Greed

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According to Reuters, some of the commissioners felt that moving too fast could damage the commodities market. Really? Here in the real world, everyone paying $3 a gallon for gasoline has been hoping someone would damage the oil futures market.

A Switch to Electric Vehicles?

The continued forward weakness in U.S. oil demand has a lot going for it. First, when the price of gasoline passed the $3 level for the first time in the fall of 2005—when multiple refineries accounting for 25 percent of the nation's refining capacity were taken offline by hurricanes Katrina and Rita—that started a slow and apparently permanent decline in our gasoline use. And now that the first baby boomers have started hitting 65, it would be reasonable to assume that their annual driving mileage will fall when they retire.

Further, if the Oil Price Information Service is correct in predicting that gasoline might hit $3.75 early next year, that fact will reduce our demand for oil and gasoline even more. But it is highly unlikely that the government's new fuel efficiency standards of 36 mpg for the 2016 new-car fleet will do anything to change our overall gasoline demand.

Why? Even when the economy is ticking along fine, it will take decades to replace the 240 million vehicles on the road with more fuel-efficient ones. Besides, the new fuel efficiency standards are only for "gasoline"-powered automobiles.

I believe electric cars will sell better than anticipated (and if gas hits $5 a gallon, they'll fly off dealers' lots) but still in numbers far too low to make much of a difference. Despite the economic incentive, American drivers still cling to the notion they can have both big cars and cheap gas. Look at what happened earlier this year when gas prices fell: Sales of SUVs and pickup trucks began to climb again.

An Abundance of Natural Gas

Here's the prediction. It's time to start the long migration out of the Oil Age, and Chrysler's Sergio Marchionne may have the best plan of all. No, it's not the Fiat 500 coming to a small group of dealers next month. It's the fact that Fiat (FIA) is heavily invested in vehicles powered by natural gas.

According to Robert Bryce, author of numerous books about America's energy needs (and the foolishness of many energy programs): "In 1989, the U.S. had about 168 trillion cubic feet of proved gas reserves. By the end of 2009, proved gas reserves had increased by 41 percent, to some 237 trillion cubic feet. But here's the amazing thing: Over that 20-year period, U.S. gas wells produced more than 370 trillion cubic feet of gas—more than two times as much gas as was foreseen in the proved reserves estimate put forward back in 1989.

"Indeed, despite the enormous amount of gas that the U.S. has produced and burned over the past few decades, the country's proved natural gas reserves are now larger than they've ever been."

That's right, we have a growing glut of natural gas in this country, and we could easily sell more vehicles capable of running on natural gas.

It's not the perfect scenario. We'd need thousands more stations pumping the highest PSI pressures to extend the range of these vehicles. (The Honda Civic GX natural gas vehicle I drove a decade ago had a horrendously low range when I filled it up at a lower PSI filling station.) But, unlike the false promise of hydrogen, this situation is easily corrected at a reasonable cost.

Electric and Gas Combined

The second stage would be to create more series hybrid electrics, such as the General Motors' (GM) new Chevrolet Volt. It uses battery power for short city trips, but instead of its onboard generator being powered by gasoline, that too could run on natural gas—yielding a hybrid electric that uses no gasoline whatsoever.

Obviously, some engineering work would be needed to design a car capable of carrying both the battery pack and a natural gas tank that could deliver what consumers would consider a reasonable range at an appealing price. Yet just as obviously, the technology is here today to do just that.

If the government's new fuel economy standards moved in all three directions at once—electric cars, improved gas mileage, and natural gas-powered vehicles—the impact on the futures market for oil and gas would happen faster and likely be more significant. Then again, just making the announcement that we intend to reduce our demand for crude oil dramatically would likely sink its price back to a legitimate discovery level.

Go After Speculators' Leverage

Peter Drucker, easily the most brilliant predictor of future trends, made his predictions simply by looking at today's reality and moving the trend line into the future to see how it would alter our society. If oil production continues to be constrained against demand, that allows the speculators and volatility to control the market. After all, speculators who never intend to take delivery of one drop of oil continue to plow more cheap capital into those contracts, thereby distorting the real discovery price.

After five years of this costly behavior, it has become clear that they're not going to change if they don't have to. The government could fix this problem quickly by severely reducing the amount of leverage or borrowing permitted to purchase commodity contracts and by raising interest rates. But neither move seems likely.

Natural gas reserves are abundant, though, and we continue to find more of that fuel than we're currently using. And because we own the natural gas reserves, using it to fuel cars offers the very real benefit of shrinking our foreign trade deficit appreciably in the near term.

Alternatively, we could do nothing and continue our present course. And we could look forward every two years to our economy being held hostage—which, when oil markets move past a logical discovery price and consumers divert $250 million and $500 million a day of their earnings from consumerism to fuel needs, does tangible economic damage.

We can keep it up, that is, until the day that oil becomes legitimately worth $250 plus per barrel. By then it will be too late to do anything but extend unemployment benefits for another decade or so.

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Assn. He reviews new cars every Friday morning at 7:15 on Fox Four's Good Day, contributes articles to Businessweek.com, and hosts the top-rated daytime talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: wheels570@sbcglobal.net, and read all of Ed's work at his news site, www.insideautomotive.com.

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