Attention Drivers: Gas Prices Will Stay Low

Last summer's gas price spike ($4 a gallon and beyond) helped push the U.S. further into recession. So, now that oil prices are starting to move higher, with lots of smart folks predicting another peak in the next year or so, should we worry about higher prices at the pump again?

Fereidun Fesharaki, one of the world's top energy oracles, says no. (Morgan Stanley's Ruchir Sharma, in a Newsweek International cover story, also thinks oil prices will trend downwards, at least in the long run.) I had a briefing last week with the East-West Center senior fellow, who counts the former Shah of Iran as one of his past clients. He turned me on to a very positive and surprising development that he says will keep gas prices in America low for another ten years: shale gas.

Apparently, we've got tons of this stuff in Texas and Florida. It's a bit tougher to get at than regular natural gas, so experts thought it was going to take a long time to come onto the markets. But lo and behold, last year it started flowing, and can be produced for the relatively low price of $24 a barrel.

What's the upshot of this? U.S. gas prices, which were already low compared to the rest of the world, can stay low for another decade, even if oil goes to $200. The implications of that are pretty huge. For starters, it helps our energy security in the short term, but it may also mean that it takes us longer to switch to more European-style fuel conserving behavior, which we desperately need to do to wean ourselves off foreign oil over the long haul. It could also stymie the move to renewables—after all, why sink a bunch of money into wind farms and plug-in car grids if gas is (semi) permanently cheap? It will be interesting to see if the Obama administration deals with all of this by raising taxes on oil and gas, which is really the only remaining way to change consumer behavior. In London where I used to live, sky-high petrol taxes mean that gas costs about $9 a gallon. Believe me, at those prices, you think twice about driving a few miles to the mall.