The Cheap Gas Trap

The price of gasoline in St. Louis averaged $2.02 per gallon on Friday, a little more than half of its $3.98 high last July. This week a gallon of regular unleaded is going for less $2 at many stations for the first time since January 2007.

Time to unload that efficient Prius for a roomy Escalade? Probably not. The good news is that sooner or later, the current recession will end. When that happens, the price of gasoline will go up. How far up depends in part on how we act while prices are low.

The danger is that we'll repeat the mistake of the 1980s, when falling oil prices led us to abandon conservation and the quest to develop alternative fuels. That mistake set us up for last summer's squeeze.

Last summer's spike in oil prices was a study in what happens when demand exceeds supply. "There was rising demand in a world oil market that simply could not drag out any more oil," says Bill O'Grady, chief market strategist at Confluence Investment Management in Webster Groves.

When that happens, just a little extra demand can shoot prices through the roof. "It's as if you had one barrel of oil and 10 buyers for it. If 10 more buyers show up, the price will go up," Mr. O'Grady said.

With the Chinese economy growing at 10 percent a year and demand for oil continuing to grow at 1.5 percent to 2 percent a year in the United States, it looked as though prices would rise forever. Speculators jumped into the market to ride the oil price wave. They made the problem worse, although there's disagreement about how much.

Then high prices did what high prices normally do: they reduced demand. Beginning last spring, Americans started driving less.

For the first nine months of this year, American gasoline consumption is down 2.9 percent, and diesel is down 5.5 percent.

But then came September's financial meltdown, bringing with it the prospect of a deep, worldwide recession. Unemployment in October jumped 0.4 percent to 6.5 percent while 240,000 jobs disappeared in America.

Today's oil prices reflect not only oil demand today, but also traders' guess at what demand will be in coming months. Their prediction: Demand is falling, and it is falling so much that not even OPEC can control prices by cutting supply.

There is more oil now sloshing around the markets than the world can use. The forces that drove prices up are in full reverse. The price of oil closed at $60 per barrel on Friday, down from July's high of $147.

This couldn't have come at a better moment. Lower gas prices work like a tax cut. They free up billions of dollars that Americans can spend on things other than gasoline, such as mortgage payments and Christmas presents. And some of the money saved will stay in America, rather than ending up in Canada, Mexico, Venezuela and Middle East oil states.

Low gas prices also mean that gas-guzzlers look affordable again, and that's both good and bad. Ford Motor Co. is adding an extra shift at its F-150 plant near Detroit because truck buyers have jumped back into the market.

That may help the automakers avoid a trip to bankruptcy court - good news for hundreds of thousands of employees. But if the United States ever is going to break its shackles to the oil sheiks and African dictators, we should act as if oil was still at $147 a barrel.

That means government policies should be directed at the long term: commitment to conservation and alternative fuels and to building high-mileage and alternative-fuel cars and trucks. Oil companies must keep looking for oil, despite the price bust. Gather ye $2 gasoline while ye may. Just don't get used to it.

REPRINTED FROM THE ST. LOUIS POST-DISPATCH.

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