Lutz Kilian Detail Image

Crude Talk

May 24, 2012 | by Marshall Walker Lee

These days, oil seems to be on everybody’s mind. The average price of gas jumped 66 cents between January and April 2012, and globally the price of crude has climbed as high as $110 per barrel. With Memorial Day weekend fast approaching, the price of gas has dipped slightly, but wary U.S. drivers want to know what’s behind the soaring cost of fuel writ large. Are financial speculators to blame? Or environmental activists? What about the Arab Spring? What can consumers do to fight the financial squeeze of $4-per-gallon gas?

"The oil market is very complex. But there is still that psychological need to have an easy explanation and then an easy fix," says Lutz Kilian, LSA professor of economics. Kilian recently sat down with LSA Today to discuss the causes and effects of oil price spikes.

"I began working on oil at a time when it wasn't very fashionable," says Kilian. Yet as consumers experience ongoing hikes and fluctuations in the price of gas, Kilian’s expertise has been in high demand with policymakers and pundits. His research has recently been featured in the New York Times, the Detroit Free Press, and on American Public Media’s Marketplace.

According to Kilian, $4-per-gallon gas is ultimately the result of economic fundamentals. “The high price is determined by the fact that there are a lot of people in the world who want to buy oil,” he explains. Even though America’s appetite for oil is waning—domestic consumption of gasoline is nearing an 11-year low—global demand for crude oil, spurred by rapid economic growth in Asia, continues to outpace production. "There isn't much the American government can do about that."

Some politicians and a handful of financial experts have suggested that increased domestic drilling could reduce the cost of prices in the United States, but according to Kilian, “The notion that America could drill its way into a world of low oil prices is an illusion.”  

"People make the mistake of thinking that just because oil is produced in the U.S. it is going to be cheap, but it's not,” says Kilian. “It’s going to be priced at the same price that oil companies can get in the rest of the world.”

Even a substantial increase in U.S. production would only lower the real price of oil by a couple dollars. That means, at best, savings of a few cents per gallon, and only if, as Kilian states, “We are willing to overlook the environmental consequences of unfettered drilling in the United States." 

According to Kilian, high gas prices aren’t necessarily a bad thing for the U.S. economy. “If oil companies are doing well then people who work for those companies or provide services for them will benefit,” he says. “And if you have oil company stocks in your retirement portfolio then you're going to benefit from that as well. But these are indirect effects."

Kilian suggests that Americans anxious to ease the strain of high fuel costs “should examine their own behavior. The only remedy for consumers will be to reduce their consumption.” In the short term, this might mean investing in smaller, more energy-efficient vehicles, relocating closer to your workplace, or turning down the thermostat.

Ultimately, Kilian says the best way to save money at the pump is to spend less time behind the wheel. The bright side? Fewer miles mean less greenhouse gases, cleaner air, and less traffic on the road. So even though you might be driving less, hopefully the journey will be more enjoyable.


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