TOPICS > Economy

Unrest in Middle East, U.S. Demand Drive Gas Toward $4 Average

April 13, 2011 at 6:34 PM EDT
As gas prices creep above $4 per gallon in parts of the U.S., a new poll shows two-thirds of Americans say they will cut down on expenses to cope with rising fuel costs. Ray Suarez discusses the effects of higher petroleum prices with David Kirsch of PFC Energy.
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JIM LEHRER: Now another economic story that’s particularly personal right now: rising gasoline prices.

Ray Suarez has our update.

RAY SUAREZ: The national average for a gallon of gasoline isn’t quite $4 yet, but it’s getting close. The average is $3.78. In some places, it’s over $4 a gallon. In Chicago, you may pay $4.59. In Los Angeles, the price can be as high as $4.70 a gallon.

A new poll today suggests prices are already affecting spending habits. An Ipsos survey found two out of three Americans said they’ve cut back on other expenses because of gas prices. Sixty-two percent said they drive less.

We look at gas prices and their potential impact with David Kirsch, director of Market Intelligence Service for PFC Energy, an energy analysis and advisory firm.

And, David, it’s a question people are probably asking all over America as their needle points toward E. Why are gas prices so high right now?

DAVID KIRSCH, PFC Energy: Well, there’s two main reasons.

I think, probably, the biggest reason why we’re already right near $4 a gallon is, of course, the unrest in the Middle East. We’ve lost a significant volume of oil coming out of Libya. This is very high-quality oil that was typically used to create — to make a lot of gasoline.

But that’s led to oil prices across the board being significantly higher up, some 20 percent from the beginning of the year. The other factor, though, is that, even prior to this, demand had also been increasing, along with the general economy had been improving, especially over the last year.

Americans had been driving more. And so we saw our inventories, our stock, our excess supplies of gasoline slowly coming down over the last several months. And that’s also led to it. So, we have factors on both the supply and demand, but it’s — it’s really the crude-oil price that’s gotten us so quickly to $4 a gallon.

RAY SUAREZ: If America’s crude comes mostly from closer places, Canada, Mexico, Venezuela, why does a crimp in the Libyan supply affect our prices here at a pump in Des Moines?

DAVID KIRSCH: Right, exactly.

Well, I mean, I think, especially if you’re at the pump in Des Moines, you’re — you’re doing a little bit better, because you have got some Canadian crude that is coming in. And it can really only go to the U.S. market.

But by and large, Americans import around 8 million barrels per day of oil. And it’s a global market. So, when the Libyan crude was lost, the Europeans and to a certain extent the Asian customers who had been buying that crude, they’re looking for other sources. They’re coming to other suppliers, West African, even Latin American producers.

So, they’re bidding up the price of crude around the world, including the crude that would normally come to the United States.

RAY SUAREZ: What’s been the effect on household decision-making, when you’re paying so much more to fill up a big tank?

DAVID KIRSCH: Right.

Well, there’s primary two effects — primarily two effects. The first and most immediate effect is that spending on gasoline, which most Americans do see as necessary and not as a discretionary expense, that starts to crowd out other spending, particularly entertainment.

Americans go out to dinner less often. They go to the movies less often. This is a type of behavior we have seen in other price increases. But the second impact — and I think you alluded to it in your introduction — is that Americans tend to have a less good feeling about their own economic well-being.

They have less encouragement about future economic prospects, and so they also delay major purchases of durable goods, washing machines, and the like. They don’t make the investments in their house, in their houses. They don’t buy the nondurable goods. And that leads to a longer-term slowdown in the economy as well. So, it’s those two channels that primarily affect the broader economy, not just — not just from the higher gas prices in and of itself.

RAY SUAREZ: Does that actual lost $10 bill, or the perception of a lost $10 or $20 bill…

DAVID KIRSCH: Yes.

RAY SUAREZ: … have enough of an effect, when you graph it out over tens of millions of households and automobiles, to slow down what looks like a gathering economic recovery?

DAVID KIRSCH: Yes, and I think that’s the real threat here, is — you know, consumption accounts for about 70 percent of the U.S. economy. And so what we’ve seen in the past is that Americans tend to actually overstate the impact of higher energy prices on their overall household budget.

Or, to put it in another way, you would say that that lost $10 should only account for a $10 loss in the economy, but they tend to save, we will say, $15, if you will, or something along those lines. So, the impact on the slowdown in the purchases of durable goods or investments in their own household does tend to have a much larger impact on the economy than would be suggested merely at looking at what the increase in gasoline prices are at — you know, with the typical consumption basket.

RAY SUAREZ: David Kirsch, thanks for joining us.

DAVID KIRSCH: Thank you.