11/ 21/ 2005
by Bill Dunkelberg
The price of gasoline hit record levels at the pump, averaging more than $3 during the hurricane attacks on the Gulf Coast. Katrina hit with gas inventories at the lowest level in history. Since Americans consume 400,000,000 gallons of gas daily, higher prices for gasoline mean even more dollars will have been spent at the pump in 2005.
But, in real terms (adjusted for inflation or viewed as the number of hours the average worker toils for 10 gallons of gas), gas prices are about where they were in the early 1980s. Still, seeing gas costs rise from $1 a few years ago to $3 adds a lot of expense to the operations of small businesses. And utility costs are set to rise sharply (due to natural gas costs), which is especially burdensome on growing firms whose sales have not yet matched their physical capacity.
How did we get here? This round of higher oil prices was driven by rapid demand growth against a production capability that has not improved much in 30 years. Oil demand typically grows about 1.5 percent a year less than economic growth because oil users have become much more oil efficient. Yet as the largest user, the United States uses only half as much oil per dollar of GDP than it did in 1970 (but GDP is much larger). In the meantime, China and India entered a period of strong economic growth. Not efficient users, their demands put heavy pressure on oil supplies and, as in any market, prices rose for U.S. consumers to 21 million barrels of oil daily. China’s oil consumption has now risen to an estimated 9 million barrels daily, and India’s consumption has grown as well.
Where does our oil come from? The largest suppliers of oil are Saudi Arabia, Russia, Iran, Iraq, Kuwait and the United Arab Emirates. We get most of our oil from nearby, about 40 percent from Canada and Mexico, and 15 percent from Venezuela. The Saudis provide another 15 percent, Nigeria about 10 percent and Iraq about 5 percent. The balance comes from 25 other producers. Obviously, no one country can shut off supply to a user country. There are too many producers who must sell oil since it is their only exportable product.
The outlook: Eventually, over the next five years, supply will respond to today’s higher prices, and oil prices will fall. But, longer term, it is not clear that supply can keep up with demand at the low prices we have become accustomed to. We have 500 years of oil supply at year-2000 consumption rates (shale, tar sands, etc.), but it is more expensive to extract. Far sooner than that, technology will find new energy sources that don’t depend on oil and natural gas.
More economic news: See how your business rates with others. Find the results of the monthly Small-Business Economic Trends report online at NFIB.com. NFIB’s Small-Business Economic Trends, begun in 1973, is the longest continuous survey of small-business optimism and conditions. Monthly surveys are sent to more than 2,500 NFIB members, and quarterly surveys are sent to more than 7,500 members.
Dr. Bill Dunkelberg, a nationally known authority on small business and entrepreneurship, has served as NFIB’s chief economist since 1971.
