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What is the outlook for gasoline and other energy prices?

Soaring gasoline and energy prices continue to garner a great deal of attention. Households are clearly concerned about the impact of rising gas prices on their individual budgets. Businesses are seeing higher gas and energy prices cutting into profits. State governments are concerned about the impact of high gas prices on sales tax collections since high gas prices may detract from spending on taxable goods. Economists are interested in the ultimate impacts of high energy prices on the overall economy, domestically and globally. The magnitude of these effects will depend on the future course of energy prices. What will gasoline, natural gas, heating oil, and other energy prices do in the short-term and in the longer-term?

First, here’s a look at some of the most recent numbers for South Carolina in terms of average regular retail gasoline prices. Though energy prices in general have followed a similar trend, it is at the gas pump that this surge is most visible. As of mid-October, the average price for a gallon of regular-grade gas stood at $2.85. Metropolitan areas in the state ranged from a low of $2.81 in the Greenville area, to a high of $2.89 in the Columbia area. Across the state, these prices are almost exactly one dollar higher than they were at the same time last year. Statewide, prices in mid-October 2004 stood at $1.87. For the U.S., the average price has risen from $1.99 to $2.82 over the last twelve months.

To begin to speculate about the future course of prices, we need to have some idea of the factors that have contributed to the rise in prices over the last year or so. As is often the case, there are both supply-side and demand-side factors leading to the rise in gas prices. Also, there are some long-term and some short-term factors involved. The sharp spike in prices in the last two months, for example, is quite clearly due to the supply-side shocks of two major hurricanes disrupting (perhaps to put it mildly) oil and gasoline production in the Gulf of Mexico and near the Gulf coast.

The relatively longer-term upward trend over the last year or more, however, has been due to a combination of real underlying growth in the demand for energy products along with concerns over potential supply disruptions due to instability in oil-producing regions. The U.S. economy and other major economies have been growing, and some economies have been growing very quickly such as China and India, leading to even stronger demand for energy products. So, the rise in prices over the last year, including the sharp spike in the last few months, has been the result of short- and long-term and both real and speculative impacts on supply and demand in the markets for oil and gasoline.

In the shorter-term future, it is probably a likely scenario to see the Gulf area supply disruptions dissipate as repairs to oil rigs, refineries, and transportation infrastructure continue. Also, there may be some slowing of economic growth globally. Slowing growth is likely to occur partly because of the rise in energy prices, but also due to the nature of business cycle movements. It is unlikely, for example, that the rapid growth in many economies would be able to continue indefinitely even without higher energy prices. So, it appears that there will be some degree of downward pressure on gas and energy prices over the next months and years. However, the longer-term outlook for energy prices depends critically on factors including: substitution towards more energy-efficiency, movements towards stability in oil-producing regions of the world, and research and adoption of alternative or additional energy sources. These kinds of developments can be impossible to predict, and therefore the longer-term outlook for gas prices is highly uncertain.

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