Inspire, Fall/Winter 2008

42 fall/winter 2008 Did you take a “stay-cation” this past summer? That’s what they’re calling it when a family chooses to stay home rather than travel — sometimes because it is simply more relaxing but often because it saves money. Let’s face it: Gas prices have kept a lot of us close to home recently. The situation begs the question, “Have we seen the end of affordable travel?” The price of travel may fluctuate from year to year, but the trend is ever-increasing travel costs. There are a number of reasons why transportation is likely to be more expensive in the future than it has been in the past. Several factors worked together to produce a “perfect storm” in the summer of 2008 — driving up the price of crude oil, increasing our travel costs, negatively impacting transportation in our economy, and, as a result, causing much of what we buy to cost more. Many of these factors are beyond the United States’ control. Since it’s on all our minds with the rapidly changing gasoline prices this year, we’ll focus on gas prices, remembering that the underlying factors causing them to fluctuate also trigger air travel costs to rise. To understand why prices have changed so much in the United States, it helps to consider past levels. We must also take out the effect of inflation and uncover what an economist calls “real” price. Based on data from the Energy Information Association and the Bureau of Labor Statistics, the diagram on the next page shows that in the summer of 2008 real gasoline prices were at an all-time high in the United States. A decade ago, they were at a post-World War II low, and we became accustomed to very inexpensive travel costs during the 1990s. What are the reasons for the rapid increase in travel costs in this century and the almost 33 percent increase in the price of gasoline between June 2007 and June 2008? The Ups and Downs Several developing nations — such as China and India — are enjoying quick economic development and, consequently, increasing their oil usage. While the United States is the largest consumer of crude oil, our gasoline consumption fell by three percent this year. Our demand is expected to be very moderate for the next two decades, but global demand will continue to steadily expand. In addition, the decline of the dollar’s value on foreign exchange markets contributes greatly to the skyrocketing price of travel since crude oil is traded in dollars. When the dollar declines, the nominal dollar price of oil increases because it takes more dollars to buy the same amount of oil. Steve H. Hanke, professor at Johns Hopkins University and senior fellow at the Cato Institute, calculates, “If the greenback had held its January 2001 value against the euro, oil would have traded at about $76 a barrel in May 2008. This is almost $50 below the price that crude oil was trading at in May 2008. Accordingly, the decline of the dollar’s value accounted for a whopping 51 percent of the $97-a-barrel increase in the price of oil from May 2003–2008.” In summary, there is no actual supply disruption to explain the high gas prices, so the increase in prices must be demand-oriented: 1. Over the long term, global demand will continue to rise as the middle class increases and more and more nations Pressure at the Pump by Dr. Bert Wheeler facul ty voi ce While the United States is the largest consumer of crude oil, our gasoline consumption fell by three percent this year.