Beyond the spike from Hurricane Katrina, why are prices going up so much?
There are a number of short-term reasons, but what it all comes down to is there’s an increase in demand around the world as more and more countries like China become more industrialized and need more oil, and at the same time, there’s no more supply to meet that demand. The result is higher prices as suppliers scramble and pay more to make sure they get their share to keep their businesses running. The higher prices they pay are passed on to consumers.

It seems any little hint of a scare causes prices to go up. Why?
I was told once that the average tank is three-eighths full in California, and that if everyone pumped to half-full, we’d have a gas shortage. That shows how tight the supply and demand is here. The reason is that we’re producing as much as we can, constantly scrambling to meet demand, and there’s no ability to build an inventory in case of changing market conditions. So that means that the smallest blip sends a panic for suppliers who want to make sure they get their share and are thus willing to pay more for it. A lot of times, these blips would not have an impact, but because of the tight market, any potential interruption forces prices to go up. Hurricane Katrina threatens to prevent boats from unloading, boom! Prices go up. Venezuela threatens not to sell to the U.S., boom! Prices go up.   

Does that mean we’re on the verge of an oil crisis?
No. High prices don’t mean there’ll be a crisis. We actually have to thank the market for prices going up. 

So you’re saying it’s good that prices are going up?
Not necessarily that they’re going up, but that they are able to do so because there are no price controls. Price controls caused the shortage in the late-’70s because no company was going to sell gas to lose money – in other words, costing them more to produce the gas than they could make at the pump. The funny thing is, despite how bad price controls worked out before, there are still calls to initiate them. I’ve heard Hawaii set a $2.91 per gallon limit. All I can say is good luck to them, because no company is going to supply gas there if they can sell it for over $3 in California. And it’s not like you can drive to Nevada from Hawaii to fill up.  

What are some products that we wouldn’t necessarily think of that will be hit by rising gas prices?
One is food. Not because shipping costs will be higher, that’s pretty obvious, but because fertilizer will be more expensive too. Natural gas is a primary component of fertilizer used for crops, and when gas prices go up, the demand for other sources of energy like natural gas go up, and prices follow. Another example is any product that includes plastic because plastic is a petroleum-based product. Even iron products, because you need to burn something to forge iron. Eventually, almost everything will go up in price because almost everything is related to energy in some way.  

A recent L.A. Times story suggested that higher gas prices might curb inflation because people will stop spending money on other things to pay their pump bills. What do you think?
I highly doubt there’s any deflationary effect from higher gas prices. They’ll see their bottom-line becoming full of red ink before they lower prices. One reason is that if there are less people buying their products, then their per unit costs will go up because they’ll be running their production processes the same while making maybe 1,000 pairs of shoes instead of 1,500. I’d say for 99.9 percent of the industries out there, prices are not going to come down. It’s just not going to happen. 

Higher gas prices can also be bad for society?
You don’t buy gas to become smarter or more productive, but the higher prices may prevent you from purchasing products that would. Something like a computer is considered a productive investment – it helps you do things more quickly, it helps your kids learn, etc. So economists consider that to be a product that betters society as a whole. But with the price of gas, maybe you don’t purchase a new computer because you’re spending an extra $100 per month on gas. That means you stick with the clunky slow machine you have. The fact that you could have done more with a new machine but now won’t means society loses out.  

So what can we do?
It’s all about cutting demand. If we can reduce demand, prices will eventually level off. You hear a lot about simple things everyone can do like driving at 65 miles per hour instead of 70, consolidating your errands into one trip, taking a train or bus, going to Palm Springs on vacation instead of Vegas.  

It’s kind of hard to see how running to the supermarket and Target on the same trip will lead to price drops. Does that stuff really do anything?
One person won’t make a difference, but when 15 million start doing the same thing, that certainly does. Tiny adjustments can make a big difference. 

Do you think we’ve reached a breaking point though, where we’ll trade in our gas-guzzling Navigators or Excursions for hybrids?
It takes at least a few months for consumption patterns to change, but it doesn’t seem like there’s been any less demand yet. I know if I were going to buy a hybrid, I’d wait until next year because there are some major 2006 tax breaks if you buy one. Plus, as more people buy hybrids, the per unit cost will come down, and with gas prices going up, it’s becoming more and more economical to buy a hybrid. Things change in economies when people are forced to adapt. Who knows, maybe we’ll be a pure hydrogen-based economy 10 years from now.