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What's Driving Gas Prices, From An Energy Insider


This is WEEKEND EDITION from NPR News. I'm Scott Simon.

The average price for regular gas is now well above $4 a gallon in seven states. Some analysts say we could hit $6 a gallon in some parts of the country as the summer driving season approaches.

High gas prices are hard on individual families who need to drive to jobs and schools, and they inhale money that might otherwise be spent on goods and services to spur more hiring and economic recovery.

Joined now by John Hofmeister, former CEO of the Shell Oil Company. He's founder and CEO of the non-profit group Citizens for Affordable Energy, and author of the book "Why We Hate the Oil Companies: Straight Talk From an Energy Insider." He joins us from London. Thanks for being with us.

Mr. JOHN HOFMEISTER (CEO, Citizens for Affordable Energy): My pleasure.

SIMON: So what is driving up oil prices?

Mr. HOFMEISTER: Demand. If Americans need more oil and the rest of the world needs more oil and we don't produce more oil, we get squeezed on price. Second, we have uncertainty which oil markets detest. The uncertainty comes from the Middle East, and the big uncertainty is whether some of the contagion that seems to be spreading in political unrest spreads to the Persian Gulf.

And so that amount of uncertainty, and the potential cutoff for oil supplies in the event of something lead future buyers, called speculators, to raise the price in order to guarantee delivery.

Over the longer term we have to worry about Asian demand that is rising rapidly and is a 2012, 2013, 2014 problem where we could get in not only to high prices, but actual shortages of crude oil, particularly in the West.

SIMON: How do we explain to Americans that despite the unrest - so far there has no, as I understand it, substantial diminution of the supply of oil from the Middle East even though oil prices are still relatively low - the price of gas is so high?

Mr. HOFMEISTER: You're right. There's been very limited reduction in the amount of crude available to the markets. So what we're dealing with, Scott, is irrational fear, and that fear drives people who must have oil in the future to pay whatever price is being bid, six months, 12 months, or longer from now, which has as a way of it - it always happens this way, it raises the prices generally.

Now, we also have seen the recovery in the U.S. bring oil demand in total back above last year's level. And so there is a demand recovery in the U.S. that's also impacting consumption.

SIMON: You know some of the politics that gets tied up with, Mr. Hofmeister. Among other things, there are people that say we ought to be concentrating on non-gas sources of energy. That that in the end is what's really gonna break the stranglehold.

Mr. HOFMEISTER: And in my book, which you mentioned, I talk about eliminating the use of the internal combustion engine to achieve just that. We have to find technical alternatives in my view over a period of time. But here's the issue for now. There's a short-term issue that can only be addressed with more supply.

There's a medium term, say 10 to 20 years from now, which we could be, and in some ways are addressing with alternatives, and there's a longer term opportunity where we could go even further away from traditional hydrocarbons.

Every president, every Congress says we're going to solve this problem. Not a single president since Nixon, including the incumbent, not a single Congress since back in the 1970s has really put forward a concerted effort sustained over time to deal with this problem.

SIMON: Mr. Hofmeister, the U.S. Department of Energy projects the average U.S. household will pay $825 more for gas this year than last year. This is money that's kind of taken out of the economy. What kind of effect do you think it'll have?

Mr. HOFMEISTER: Well, it's particularly aggravating when the median income of families is $38,000 a year. $800 on $38,000 is a very severe loss of disposable income, and to think that money is mostly going to foreign nations that are selling us imports instead of back into our own nation, is even more, I think, disgraceful.

But for many people this is a choice of medicine or whatever it may be. It's a tough choice, and I think that the invisible tax that is being placed upon Americans with no vote whatsoever about this tax really needs to be remedied by a political system which has the means to commit the nation to more production of domestic resources to alleviate this problem over the next ten years.

SIMON: Um-huh. So you're, in addition to what you've talked about - non-fossil fuel energy in the future, you believe it's necessary to widen domestic production?

Mr. HOFMEISTER: I think for the next 10 to 20 years, if we don't increase domestic production, we won't just be complaining about high prices, Scott, we'll be standing in gas lines, and Americans are not kind to each other when they stand in gas lines, especially when it's of our own making. We have the alternative to produce our own.

Until we get off the internal combustion engine, until we find other sources of material supplies of fuel, we really have to come to grips with the here and now. And the prices are here and now, and in a couple of years it could be the gas lines are here and now, and we have just not taken care of our own people, and there's something wrong with that.

SIMON: John Hofmeister, former CEO of the Shell Oil Company, and now CEO of the non-profit group, Citizens for Affordable Energy, speaking with us from London. Thanks so much.

Mr. HOFMEISTER: Thank you. Transcript provided by NPR, Copyright NPR.