Higher and higher
With no respite in sight from rising fuel prices, policymakers face increasing pressure to find solutions
by Stephanie Zimmermann
Some people define success as being able to slide behind the wheel of a brand-new, fully loaded, leather-interiored Land Rover. Not Neil Koreman.
The Chicago man bicycles three times a week to his teaching job at a suburban high school, plans to buy a hybrid when his current vehicle dies and, when asked what kind of car he owns now, replies "a green one." This summer, instead of piling the kids into their well-worn Ford Taurus wagon for a road trip as they have in summers past, Koreman and his wife Margaret will fly the family to Canada and take trains across Quebec to Toronto, a route that will rule out their usual drive to a campground but will save on gasoline and, they hope, play a small part in reducing global warming.
With gas prices expected to spike at the start of the summer driving season and the public's growing concerns about the environment, Koreman isn't alone in his desire to leave the car behind. "I'm using less gas and I think it's just better for my family. It's better for our society."
Such sentiments are becoming commonplace, even in the automobile-happy Midwest, as consumers face another year of high gasoline prices. That the high pump prices — which could top $3 a gallon this summer — come on the heels of increased prices for natural gas used to heat and cool homes makes them even tougher to take. Thanks to high demand, low gains in production capacity and geopolitical uncertainty, crude oil prices — upon which gasoline pump prices are largely based — are expected to remain high through the end of the year, according to the Energy Information Administration, the statistical agency of the U.S. Department of Energy. "I don't see prices going back to where they were a couple years ago," says Tancred Lidderdale, a senior economist with the agency.
Those high prices, and the prospect that they're not likely to drop way down for a long time — if ever — are forcing policymakers to search for ways to blunt the impact. And not a moment too soon for anxious consumers.
As the United States enters its fourth year of conflict in Iraq, and Louisiana and Mississippi continue to struggle with rebuilding after Hurricane Katrina, prices for the gasoline and natural gas most consumers depend upon will continue to rise, experts agree. Gas prices already had inched up to $2.88 in Chicago on April 15, according to the Web site, www.chicagogasprices.com.
The reasons are many. The summer travel season sparks a seasonal leap in gas prices. Beyond that are worries about crude oil disruptions in places like Iraq, Iran, Nigeria and Venezuela, and greater demand globally in such places as China, where the need for crude oil is expected to rise from 6.9 million barrels per day in 2005 to 7.9 million barrels a day in 2007 — a leap of 11.5 percent in two years. Domestic political issues also contribute. For instance, requirements that gasoline producers eliminate the additive MTBE in favor of corn-based ethanol — and the subsequent squeeze on ethanol supplies — will contribute to this summer's price hikes.
The new ethanol requirements, enacted to help reduce air pollution, are good news for Illinois, the second-largest ethanol-producing state behind Iowa, but difficult for motorists in the short term as the market waits for ethanol production to catch up with demand.
Eventually, says Hans Detweiler, the Illinois department of Commerce and Economic Opportunity's deputy director for energy and recycling, increased use of ethanol should contribute to lower prices as consumers rely less on volatile crude oil. Nationally, ethanol production capacity is at 4.3 billion gallons a year, up from 3.9 billion gallons in 2005, and production is expected to grow.
Gas prices traditionally rise in summer, but analysts are warning that any constraints on supply, such as further problems in Iraq or localized disruptions, could make it a miserable few months.
For many Illinoisans, paying more to fill their cars with gas this summer is just one additional hardship after a winter of higher than normal prices for natural gas. According to the Energy Information Administration, the average residential price per thousand cubic feet was $15.31 nationally in the last quarter of 2005, up from $11.40 the same time in 2004. Despite relatively warm weather, heating bills this past winter in the Midwest averaged about $1,100 per household, up about $250 over the previous winter and about $600 since the winter of 2001-02.
Some of the increase in natural gas prices was a result of disruptions in supply after Hurricane Katrina and other storms. But supplies seem to be tight in general. Natural gas production in Canada is at its maximum now, and few U.S. ports can handle liquefied natural gas imports from other countries.
Whatever the case, the fallout from natural gas price volatility can be seen in places like central Illinois, where the Peoria Citizens Committee for Economic Opportunity had to pay $7,500 to heat its Head Start facility last November and December, up from $3,200 in October and November. "We had to amend our budget" to pay for it, explained McFarland A. Bragg II, the group's president and CEO. In Galesburg, Lynne Tyler, head of the local chapter of the American Red Cross, saw an influx of people this past winter with slightly higher incomes seeking assistance with their heating bills. "And now we're looking at electricity rates going up in '07, so I don't know what people are going to do."
The future could be grim. A hot summer with a heightened demand for air conditioning could make Illinoisans' natural gas bills soar once again. "We dodged a bullet [last winter]," Detweiler says. "We prayed for warm weather and our prayers were answered. The scary part is praying for warm weather is our national energy policy."
With such volatility in prices for gasoline and natural gas — two products most Illinois consumers are thoroughly dependent upon — what can be done to eliminate some of the shock?
The answer isn't one policy or even one area of policy. "There is not one solution," says Athanasios Bournakis, principal research economist with the University of Illinois at Chicago's Energy Resources Center. "There are going to be a bunch of solutions."
On the issue of natural gas, a new emphasis on expanding the nation's pipeline capacity, along with exploring for new deposits of natural gas and building more port facilities that can accept liquefied natural gas from overseas, would go a long way toward reducing the industry's concentration in one region of the country. This would help bring prices down and provide protection from hurricanes or other isruptions, Bournakis says. "Our entire approach to safety is not thought out very well. Even terrorism [attacks on the distribution] could break up the system at any moment."
Illinois also should continue to pursue research into clean-burning coal and coal gasification, using one of the state's great natural assets to replace natural gas dependency, Bournakis argues. Solar and wind energy also must play a role.
Illinois Attorney General Lisa Madigan, along with attorneys general from Iowa, Missouri and Wisconsin, is working on another piece of the natural gas price puzzle. The group commissioned a report released in March that blamed speculative financial markets for volatile natural gas prices that seem to go up even when demand is flat. It has called for more oversight of these relatively loosely regulated markets, including adding a "cooling off" mechanism that would halt natural gas trading temporarily if prices moved too much.
Madigan also has spoken out against price gouging in gasoline sales. After Hurricane Katrina, the attorney general took to task 18 Illinois gas station owners whose prices appeared to be far higher than the increase in the wholesale price — with one station tacking on an additional 58 cents per gallon beyond the increased cost it was paying its supplier. The station owners settled, each donating $1,000 to the American Red Cross and agreeing to abide by the law.
To prevent future problems, Illinois now has an administrative rule in its consumer fraud statutes stating that the pump price can't rise disproportionately in the first 45 days following an emergency market disruption, such as that caused by the hurricanes. "We're not going to say you can't pass on your increased costs. But during an emergency, you can't profit from that," says Deborah Hagen, the attorney general's chief of consumer protection.
Hagen cautions, however, that the new administrative rule won't do anything to stop pump prices from rising this summer because of the normal summer price Kyle and the current hike in ethanol prices.
For its part, the petroleum industry says pump prices could come way down in Illinois if gasoline weren't so heavily taxed — at a rate of some 70 cents a gallon in Chicago, says David Sykuta, executive director of the Illinois Petroleum Council. "The people that make a lot of money on that are the units of government," Sykuta says, and when prices go sky-high, those governments get even more.
The industry also blames environmental bans on drilling for oil in "politically untouchable" areas of Alaska, off-shore in the Gulf of Mexico and under Lake Michigan for contributing to our tight supply of crude oil and natural gas. "Most politicians are in the business of telling people they can have everything they want without having to do anything,'' Sykuta says, "and then when crude prices go up, they say it's a big conspiracy by the oil companies. Anybody that tells you we're going to alternative fuel our way out of this is not telling the truth."
Still, old-fashioned conservation will help, not only for its eventual impact on prices but for the environment. U.S. Sen. Barack Obama, an Illinois Democrat, in remarks he prepared for an April speech, critiqued President George W. Bush's energy proposals: "You'd think by now we'd get the point on energy dependence. Never has the failure to take on a single challenge so detrimentally affected nearly every aspect of our well-being as a nation. And never have the possible solutions had the potential to do so much good for so many generations to come."
If we use less electricity, we'll also use less natural gas. The same thing goes for turning down the thermostat in office buildings and at home. To help keep gas prices down, don't buy that Hummer; drive a more efficient car and combine trips. Federal, state and local governments can encourage these changes by offering tax breaks for such activities as using mass transit or commuting in "van pools" of four or more people, as well as incentives to install high-efficiency furnaces or weatherproof one's home. In New Hampshire, the Pay As You Save (PAYS) program lets utility customers buy items such as energy-efficient air conditioners debt-free; the purchase cost is then spread out on their regular utility bills.
In Illinois, Gov. Rod Blagojevich has proposed a $500 tax credit for consumers who purchase a hybrid vehicle or a flexible fuel vehicle that can use E85 gas, a blend composed of 85 percent ethanol and 15 percent gasoline. Blagojevich also pushed for sales tax exemptions, signed into law, for E85 and biodiesel blends. Now, says Detweiler, the challenge is to get more gas stations to provide pumps that can disperse E85; only about 100 stations statewide do so now.
Koreman, the teacher from Chicago, holds out hope that something good might come out of high gas prices: a greater willingness to conserve energy, develop new technologies and rely less on cars to get around.
"I think we need to examine how we get to and from where we're going," he says. "What we use costs us in one way or another."
Michael H. Hudson was the vice president of public affairs at Illinois Tool Works Inc. and chairman of the Illinois Issues board at the time of his death in 1992. In his memory, fellow board members established an annual article to examine an economic trend in Illinois and its relationship to public policy. This feature is funded by a donor who asked to remain anonymous.
Stephanie Zimmermann is a consumer reporter for the Chicago Sun-Times.
Issues, May 2006
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