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$4 Gas: Get Used To It

Get in line.
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Get in line.

Oil prices fell sharply today, which means gas prices are likely to fall a bit in the short term. In the long term, though, there are a few big reasons to expect higher prices.

In China, there's one car or truck for every 14 people. In the U.S., the ratio is nearly one to one.

But China's catching up. The country is now the world's biggest car market, and the the number of civilian vehicles in the country grew by an astonishing 19 percent last year.

As a result of this kind of growth, demand for oil is shooting up in China and other developing countries. And it's likely to keep rising in the years years to come.

But the world's big oil-producing regions may be unable or unwilling to increase production fast enough to keep up.

The combination of long-term increases in demand and sluggish growth in supply means we should get used to higher prices for oil — and, by extension, higher gas prices.

It's true that the most recent spike in oil prices was precipitated by unrest in the Middle East and North Africa. So if things settle down in the region, the price of oil and gasoline will likely fall in the short term.

But those longer-term trends aren't going away.

/ Energy Information Administration
Energy Information Administration

Saudi Arabia, the world's largest oil supplier, has historically increased production when demand rose. But, lately, it hasn't been doing that. The country is now producing less oil per day than it was in 2005.

Saudi Arabia hasn't publicly explained the change , according James Hamilton, an economist and oil expert.

It's possible that the country has decided its economic interest is best served by producing less oil. It's also possible that the country just isn't able to increase output.

"Their main field, the world's largest producing field, has been in production since 1951," Hamilton told me. "Sooner or later, that's going into decline. A lot of people think it's now."

Other big fields, including those in Mexican waters and the North Sea, are also in decline, he said.

Hamilton said that two common complaints about higher oil prices — that they're caused by publicly traded oil companies, and that they're caused by speculators — don't hold up in the long term.

Publicly traded oil companies account for a minority of global oil production; most oil is supplied by state-owned oil firms. Those countries try to regulate oil production via OPEC, but they often fail to stick to predetermined targets. In other words, the cartel often doesn't function very well.

And speculators can't affect the price of oil in the long term. If they bid up the price higher than the market can bear, oil stockpiles will increase, which in turn will put downward pressure on prices.

"There's an underlying reality on the ground, which is the people consuming the oil and the people producing the oil," Hamilton said.

Even as growth slows from Saudi Arabia and other big producers, other regions around the world may pick up the slack. Iraq, Central Asia, and parts of Africa, Canada and the U.S. all may increase output, according to Hamilton.

That could drive down prices for a while. But, in the medium term, there's a good chance that supply just won't be able to keep up with demand.

"The demand is pretty darn sure," Hamilton said. "Even if we get through a few years here, we're going to be right back in the same boat soon."

For a look at what that might mean, Hamilton cited the years leading up to the financial crisis.

Between 2005 and 2007, he said, China's oil consumption increased by 1 million barrels a day. But global oil production didn't increase at all. So other countries wound up consuming less oil.

A key lesson from those years, Hamilton says: "It takes an awfully high price of oil to persuade us to reduce consumption."

Note: This post was updated to reflect today's fall in oil prices.

Copyright 2020 NPR. To see more, visit https://www.npr.org.

Jacob Goldstein is an NPR correspondent and co-host of the Planet Money podcast. He is the author of the book Money: The True Story of a Made-Up Thing.