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Executive Director's
Report - Convention Issue 2005
Gas prices are a serious concern for county budgets
County officials are now entering the portion of the fiscal year when they start thinking about the next years' budget. Of all the budget components, one that is becoming larger in terms of dollars and more difficult to predict is fuel costs (generally costs for gasoline and diesel).
The increases in fuel costs experienced in recent years has everyone concerned. The obvious and most frequently heard question is, "why are gas prices going up so much?" An excellent article on the subject appeared in a recent edition of County, a publication of the Texas Association of Counties. The article was written by County Staff Writer, Maria Sprow. She does an excellent job of explaining gas (fuel) prices from a global prospective. As a bonus, she added some insightful tips on improving mileage and some interesting information about fuel additives and related gimmicks.
The article is reprinted below with permission. While article will not help much with addressing the problems of how much to budget for fuel or where the money will come from, there may be some comfort in knowing why we must face them. Readers should keep in mind that the original article was written prior to Hurricane's Katrina and Rita. These two national disasters are impacting and will impact fuel prices in ways unanticipated by Sprow.
(A final note and observation. After attending the annual conference of the National Association of Counties held recently in Honolulu, Hawaii, my family enjoyed a three-day vacation on the island of Maui, which for the record was paid for with our personal resources. At one point while enjoying the island from a rented vehicle, it became necessary to purchase some gasoline. We were somewhat surprised at having to pay $3.47 per gallon. It is great to be back in Alabama.)
A Crude Vacation
To figure out mysteries of the pumps, officials must first head to New York
Maria Sprow, Texas Association of Counties
Figuring out the world of gas prices requires one long vacation, with a number of stops: New York. Asia. And the Middle East. And then back home again - and suffice it to say, that's only the most basic travel package.
But county officials who are wondering what exactly is going on at the gas pumps and why it's just so darn hard to budget for gas may find the learning excursion helpful.
First and foremost, gasoline is a commodity, and here is where New York becomes a vital stop to figuring out why gas prices are so high: the New York Mercantile Exchange, otherwise known as the NYMEX. According to the NYMEX web site, it is the largest physical commodity exchange in the world, trading energy and metals. This is where the action happens - where each and every market fluctuation or factor is cheered for or cried about. This is the home of the buying, selling, and trading of gasoline.
"It's minute-by-minute. There are people yelling or screaming, trying to buy or sell gasoline," said Peter Nance, the senior principal at Teknecon Energy Risk Advisors in Austin. One moment, an oil tank in Iraq gets blown up, and the price skyrockets, and buyers go nuts and sellers go out to dinner - but it's only for the moment. In other moments, events could happen that may be farther-reaching, such as new rules being put into place.
Basically, gas price fluctuates because those buyers and sellers in New York can't predict the future, especially when it comes to oil.
"People buy and sell gasoline or crude oil based on what they perceive supply and demand will be in the future," he said, adding that the term 'future' may mean a day from now or a year from now. "The traded price is no forecast of the actual, final price. It's just based on an idea of what may be the fair value based on all the information we know right now."
So gas is a commodity - but that's nothing new.
What is new, however, is exactly how many cars are being driven around the world. So now, it's time to head to Asia.
The United States has always been the world's largest consumer of oil. But recent development in other countries - especially China - has had major impacts on the gasoline market, as more and more people are buying and driving cars.
"Crude oil demand has gone up substantially, as certain parts of the world, primarily Asia, have industrialized rapidly," Nance said.
Not that everyone in China or India has a car now. But the volume of gasoline use there is expected to increase much more dramatically there over the next several years than here.
Demand for gasoline, of course, is one of the two factors that cause the volatility over at NYMEX. Between 1998 and 2003, U.S. gasoline demand rose an average 0.6 percent per year. Worldwide, Nance said, petroleum demand over the same period has risen about 2 percent each year - until 2004, when it rose by 3 percent due to unanticipated but growing demand in some counties. Additionally, demand growth for some petroleum products, such as diesel, is higher - about 5 percent between 2004 and 4005, Nance said.
So, gasoline and crude oil are commodities exposed to a growing global market. Which wouldn't be a huge problem, except for a couple of things: a) Gasoline is a limited resource and B) there haven't been many structural changes to the infrastructure of oil producers. In other words, gasoline demand is growing more quickly than available refining capacity.
That brings us to the Middle East, or other regions that are known for oil production. While some oil-producing nations have always been able to increase supply with demand before, they may not be able to do so in the future, at least, not with their given techniques and equipment.
"Demand has grown substantially - substantially - over the past few years," Nance said. "That means, in short to medium terms, that within the next couple months to the next couple years, we have a situation where there is instability in supply and a shrinking gap between productive capability and demand."
But the problem isn't just outdated infrastructure. It's also everything else going on in those countries - the war in Iraq being just the most visible de-stabilizing element. For example, in 2002, production in Venezuela shut down for a time because of political turmoil and oil worker strikes. The same problems are plaguing Nigeria, another oil-producing nation.
The decisions made by OPEC - the Organization of the Petroleum Exporting Countries - also tend to have major impacts over at NYMEX, which then influences the pump prices.
When the Kosovo war began in 1999, gas prices when up. When OPEC decided not to raise production quotas later that year, they kept going up. Prices dipped down shortly in 2000 after OPEC did decide to expand production volumes, but then they sky rocketed back up again until the US national oil reserves were released. In 2001, drastic increases in price were seen three times - each because OPEC cut its production. Gas prices then fell after Sept. 11, but rose again in 2002 after the Middle East conflict began escalating.
Then there are other, more local factors. Like this vacation. Memorial Day starts the driving and flying season here, and traditionally, summer is a time when gas prices rise.
But despite all the factors - despite the war, despite increased industrialization, despite the popularity of SUV's - it's not as bad as it seems.
According to US Department of Energy statistics, the price of gas today just sounds higher than it was five, ten, and twenty years ago. In reality, however, gas has been putting the same strain on the wallet since the 1950s.
When adjusted for inflation (year 2000 dollar figures), drivers in 1950 paid the equivalent of $1.91 per gallon of gas. Prices dropped then.
--In 1955, they paid $1.85 per gallon
--In 1960, the price was $1.79
--In 1965, it was $1.68
--In 1970 it was $1.59 (all prices adjusted for infla- tion to 2000).
That was, until they sky rocketed back up again in 1973.
In 1975, gas cost the equivalent of $1.80. From 1979 to 1980, it reached its peak price of around $2.59 a gallon (when adjusted). Then it decreased again - by 1985, it was around $1.90 a gallon in today's terms; in 1990, a $1.51 a gallon.
It reached its all-time low somewhere around 1995, when gas was just $1.28 a gallon (in actuality, back then, gas station signs still advertised unleaded for less than a dollar).
So for some, it was that all-time low that really came back to bite. Many people just didn't realize, or forgot, that it was a sale. When prices jumped back up to $1.66 in 2001, they seemed high. When they reached an average price of $2.17 in Texas in April - keeping in mind that's about 10 cents lower than the national average, according to AAA figures - the jump seemed outrageous.
"It's typically a very volatile commodity, but the effect on consumers is magnified because prices were already high," Nance said.
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