Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

$5/gallon gasoline isn’t that bad

Posted by butalidnl on 10 April 2010

The economy of the US is recovering. In two years time, GDP will probably be at the level it was before the great recession. This should be good news, except for one thing: before the great recession, oil prices reached $150/barrel, which meant that gasoline was $5/gallon. Things have not improved since the last time, in terms of oil supply; in fact, they have deteriorated, since oil consumption in Asia had been rising even during the time when the US was in recession. Thus, when the US economy will be “back to normal”, total world oil demand will be higher than it was when oil was $150/barrel. Which brings us to the conclusion that oil prices will go to $150/barrel or higher by 2012.
Is this going to be so bad?
Well, yes and no. Yes, in that people’s budgets aren’t yet adjusted to a $5/gallon price. No matter how you look at it, this will be a blow to consumers’ ability to consume other things. However, after the initial shock, we will see that that price rise isn’t so bad after all.
Europe has been living with that price for years, and its people aren’t miserable; and of course, with $150/barrel their oil prices will go even higher. So, it is a price that you can live with. But the thing about higher oil prices is that it shifts economic patterns in a way that may be good for you, in a way.
Let us take a look at some of these:

Higher gasoline prices will mean higher cost of transportation. This will also affect the transport of goods from places like China. All of a sudden, some goods will no longer be cheapest when sourced from China; meaning that it may be cheaper to produce them in the US (or Mexico). If US manufacturers are smart, they will then start producing more in the US, than importing them (of course, the thing is to hit on which products to do this with). And this translates to more manufacturing jobs in the US. This can’t be bad news.
The high cost of gasoline will also affect the way you commute to work. The long commute will be more expensive, meaning that you may be forced to take public transportation (buses or trains) to work, but it also means that it pays to move to smaller, integrated towns, where work and most services are relatively near. Of course, the shift to more integrated towns, instead of the system of sprawling suburbs would not be easy or happen instantly. But it will happen gradually, and you may end up having a nicer quality of life when you don’t need to commute too much.
Food prices will also be affected by higher transport costs. This would also affect the way food is produced. Now, meat is produced by gathering lots of cows etc, and fattening them in feed lots. This system is quite prone to all kinds of diseases, and is rather taxing on the environment. When it becomes too expensive to transport the cows etc to central locations, production will become more decentralized, not only for meat, but for all food. And this means that you will be able to enjoy locally produced food at more reasonable prices.
With a higher price of gasoline, the demand will be for smaller, more fuel-efficient cars. Maybe even electric vehicles. And these would be quieter, give out no smoke (less polluted city centers), and would be cheaper to operate than gasoline cars. Wouldn’t it be nicer to live in a city where most vehicles are electric?
And maybe people would walk more. It is certainly cheaper to walk to school or work, or go there by bicycle, than to go there by car. And if this happens, it would also help reduce obesity, since people would be getting more exercise.
Of course, all these may not happen immediately, or even when $5/gallon comes. But the trends are there, gasoline prices will go up, and the changes I have just enumerated may become more and more the reality.

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