How High Can Energy and Petrol Prices Go?

Add Libya and Japan to the inevitable summer price rise, and gas could hit $5 per gallon in the United States

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Hi, this is Steven Cherry for IEEE Spectrum’s "This Week in Technology." There’s continuing turmoil in Libya and the rest of the Middle East, the source of much of the world’s petroleum and natural gas. In Japan, a number of nuclear reactor plants are permanently off-line now; elsewhere, some reactors have been taken off-line voluntarily. The Chinese economy is still racing along at a feverish rate of growth, and as other nations slowly throw off the cloak of global recession, industrial activity is back on the rise. Summer in the Northern Hemisphere will soon be upon us and with it long car trips, air travel, and air conditioning. It sounds like a perfect storm leading to higher prices at the gas pump and in your electric bill. How high can they go?

My guest today is William Sweet. He retired as a senior editor at Spectrum covering news, power, and energy two years ago and has stayed on to edit our Energywise Web site and newsletter. He’s been a guest on this show several times, most recently to talk about the Cancun summit on climate change. Bill, welcome back to the podcast.

Bill Sweet: Thanks, Steven. Nice to be here.

Steven Cherry: Bill, which is going to give energy prices the biggest kick—turmoil in the Mideast or meltdown in Fukushima?

Bill Sweet: Well, that’s the million-dollar question, if that’s the right expression that I’m trying to scrape up from the distant past. I was just thinking, Steven, that the people at the International Energy Agency in Paris who have to produce an annual report every year on what’s ahead in energy must be having a truly nightmarish time of it right now. Nobody knows really which is going to have the bigger impact, because of course events are still unfolding in the Middle East, and we have no idea which countries might get sucked into those convulsions in the months ahead or how quickly on the other hand they might just suddenly come to an end. I think we can say—though, Steven, I think you caught a lot of the major factors in your introduction—prices for all forms of energy are going to go higher.

Steven Cherry: So, I gather we know from the oil shocks of the ’70s and also recent summers, it doesn’t take much of a change in supply to really make a big change at the gas pump. How does that work?

Bill Sweet: That’s right. This is one of the things that struck me again immediately when the insurgency broke out in Libya. Libya is not that big an oil producer; you know, I think it supplies something like 1 or 2 percent of the world’s supply, and the insurgency resulted in its exports going down rather abruptly by perhaps a half, and yet immediately the effect on world oil prices was dramatic. We’re paying now almost 4 dollars at the pump here in Brooklyn, New York. A month or so ago, a former CEO of Shell Oil was predicting that by mid-decade, gasoline prices would be at 5 dollars a gallon, and that seemed like a bit of a pessimistic prediction, although I understand that there are other companies—Toyota, for example, and the Chinese electric battery and car manufacturer BYD—they are also predicting that gasoline prices would be 5 dollars or even 5 dollars and 50 cents by 2015. But you know the truth of the matter is, gasoline prices may be 5 dollars and 50 cents next week for all we know, the way things are going right now. It really all depends on what happens in the streets of various Middle Eastern countries.

Steven Cherry: Now, just remind us how gas prices work in Europe—they already pay much higher prices at the pump due to largely through taxes. Do governments reduce the taxes when the price per barrel rises or do they just let their citizens take the hit?

Bill Sweet: I don’t think they do. It’s true that gasoline prices are much higher to begin with in European countries, and as a result, when global oil prices go up abruptly the way they are right now—and the way they did in the ’70s and the way they did again at the end of the ’80s—the percentage increase of gasoline prices at the pump, or petrol prices if you will, is much smaller in Europe than it is here. And so these convulsions in the world don’t have the same kind of immediate political impact that they do in the United States. I don’t think they really need to adjust the prices for that reason.

Steven Cherry: Now the change in the availability of nuclear energy—how does that effect electricity prices? Will it affect it at all in the short term?

Bill Sweet: Uh, yes, there will be both short- and medium-term and likely long-term effects on prices from the nuclear crisis. In the first place, as you know, just the nonavailability in Japan itself of the nuclear plant that is affected, and nearby nuclear plants, is quite immediate and quite drastic. And so that’s certainly going to drive prices higher and already is driving prices higher. In Germany, the government of Angela Merkel, the slightly center-right government, has been trying for the last few years to end Germany’s plan to phase out reliance on nuclear energy, a policy adopted earlier by a coalition of Socialists and Greens. The slogan on the—I don’t want to say political right, but the slogan in the conservative parties in Germany has been to negotiate a so-called exit from the nuclear exit. It looks like Angela Merkel just threw in the towel on that—she is, by the way, herself a Ph.D. nuclear physicist, and she has been, you know, a moderately consistent and strong proponent of nuclear energy. But immediately after the Japanese crisis erupted, she closed seven nuclear power plants in Germany, the seven oldest, and has announced that all nuclear reactors are under review. It certainly looks to me like in effect she’s saying things have gotten to the point now where she can no longer really defend nuclear energy to the German public, which has been very skeptical and quite hostile right from the get-go. So those are just two notable examples. But here in the United States, it’s I think clear that some of the more controversial nuclear power plants in the United States are going to come under immediate review again—they already are. One is right here in New York: Indian Point, which is located—I don’t know, 25 miles north of the city on the Hudson River. The Vermont state legislature has been trying to close the Vermont Yankee plant. There are two nuclear power plants, large nuclear power plants on the coast of California that of course are vulnerable to earthquakes and tsunamis. I think it’s a pretty fair guess that those plants will all be closed, after some further discussion or review. Furthermore, almost all the nuclear power plants operating in the United States—and this is true in fact in all the advanced industrial countries—almost all the plants were built in the ’70s and ’80s with an intended lifetime of about 40 years. All of those plants are coming up for relicensing. Generally, the policy has been to extend those licenses for 20 years. The reason for that is that these plants, in the last 20 years, have come to operate, in general, extremely well. There were a lot of teething problems during the first 10 or 20 years of nuclear energy, but in the last 20 years, generally speaking, nuclear power plants have been producing electricity at a very, very high and steady rate; I mean, we’re talking about capacity factors well up in the ’90s. That means that a typical nuclear power plant is producing electricity, you know, on the order of 95 percent of the time. So these existing plants have become actually very economic to run and very desirable to run, except when something goes wrong. But as an awful lot of people are saying right now, the thing about nuclear is, that when things go wrong, they really go wrong.

Steven Cherry: Bill, is that likely to have any short-term consequences for energy prices—perhaps in Japan obviously and maybe Germany as well—but for most people in most places?

Bill Sweet: I think everywhere where nuclear power is producing electricity, there’s going to be some kind of worried and skeptical reaction; people are going to start bidding up prices for alternative fuels in the expectation that those fuels are going to become more needed in the years immediately ahead. And consequently, any utilities are going to be paying more for anything they use to make electricity, whether it’s coal, natural gas, or nuclear itself. On March 17—that was just four or five days after the accident in Japan—the Financial Times had an article saying "Nuclear Problems Put Energy Markets in a Spin." In just the four or five days from the accident, European natural gas prices had gone up 13.4 percent, European coal prices had gone up 10.8 percent, permits to emit carbon dioxide had gone up 10.8 percent. The only fuel price that had declined in those four or five days after the accident was the price of uranium, which went down 25 percent. By the way, a little-noticed trend in the last few years has been—and I have to say this is a little bit counterintuitive, given our concerns about global warming—global coal prices already were going up very radically in the last few years, even before these recent events in the Middle East and the nuclear disaster in Japan. For example, the Asian annual contract price for oil—so-called—went up from 2003 to now by a factor of more than 4; European spot prices in just the last couple of years have gone up by a factor of 2 and a half; Japanese and Chinese coal imports are rising very sharply. So it’s to be assumed that, as people generate more coal because of having less nuclear energy available, those prices are going to go up even more. I think we’re also going to start seeing something of the same in the natural gas markets. As you probably know, in the last few years reserve estimates of natural gas have gone up very sharply, and prices for natural gas have kind of decoupled from oil and have been relatively low. So everybody is burning a lot more natural gas to produce electricity, and it’s a fair guess now that the easiest thing actually to do if you suddenly lose any source of electricity generation is to use more natural gas, because natural gas plants can be fired up and fired down very quickly and easily; natural gas is readily available, readily transportable, so with the loss of nuclear generating capacity, both actual and expected, we can assume that the first place everybody’s going to go is natural gas.

Steven Cherry: And that’s doubly so, I guess, in Europe, where they’re really concerned about greenhouse gases. And nuclear is relatively free of greenhouse gases, and so is natural gas, so I guess to the extent that nuclear is going to take a hit, if we’re concerned about climate change, natural gas is a way to take up the slack.

Bill Sweet: That’s absolutely right, Steven. Listen to what Germany’s Deutsche Bank said in a report last week. Quote, "Nuclear power has suddenly found itself going from being arguably part of the solution for future green energy to a now-dangerous relic of the Cold War era." So [laughs] that’s Germany’s leading bank commenting on the situation we find ourselves in.

Steven Cherry: So it sounds to me like if you want to do a little springtime financial speculation, oil prices are one place to go, but natural gas would be a sure thing almost.

Bill Sweet: Yes, that’s one thing you can do, and another thing you can do is go out and buy yourself a hybrid electric car or a highly fuel efficient gasoline car.

Steven Cherry: Very good. Well, thanks a lot, Bill, it’s enlightening as always.

Bill Sweet: It was a pleasure, Steven.

Steven Cherry: We’ve been speaking with Bill Sweet, editor of Spectrum’s Energywise blog and newsletter, about how high gasoline and electricity prices can rise. For IEEE Spectrum’s "This Week in Technology," I’m Steven Cherry.

This interview was recorded 23 March 2011.
Audio engineer: Francesco Ferorelli
Follow us on Twitter @spectrumpodcast

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