HONOLULU (April 4, 2008)—Drivers in the United States have to face up to reality: They are about to face painfully higher prices at the gas pump, East-West Center senior researcher Fereidun Fesharaki says.

The only real choice is whether the extra money flows into the pockets of those who find, produce and sell gasoline, or whether it will be kept at home in the form of higher taxes.

From his point of view, Fesharaki said, he’d much rather see the price hike be driven by taxes, which in theory can be used by government to improve alternate forms of transportation and new forms of energy.

Fesharaki is an internationally recognized expert in energy and has advised governments and businesses on fuel and energy policy. It seems clear, he said, that oil-driven energy prices are going to continue to rise, particularly in the United States. While there are many factors behind shifts in the price of oil, the fundamental explanation is one of supply and demand, he said.

“In about five years, demand will outstrip supply and the price will have to go up (even more),” Fesharaki said. “The future is one of an unstoppable force – demand – versus an immovable object – supply limitations.”

The only thing that can give in that situation, Fesharaki said, is price. He foresees gasoline prices at the pump rising to an average of $6 a gallon. While that may seem daunting to American drivers accustomed to cheap gas, it is already the rule of the day in much of the world, including Europe and Asia, he said.

And that is not necessarily altogether a bad thing, he argued. In the United Kingdom, for instance, gasoline is around $9 a gallon, with fully $7 of that price going to taxes. Authorities there recognized that the only way to moderate demand and produce the cash needed to explore alternatives is to impose heavy taxes, he said.

No one likes those high taxes and high prices, he acknowledged, but the balance between supply and demand suggests prices would rise to the edge of consumer tolerance whether the taxes are imposed or not. So why not keep the money at home? “The one thing that could hit right away is something we dislike, which is taxes,” he said.

“But if you don’t increase taxes,” he said, “the market will tax you anyway. In other words, if you don’t do it, somebody else will.”

Regulation may have some value in diminishing demand and holding down prices, Fesharaki said. The U.S., which is the world’s biggest consumer of oil, could save “huge amounts” by mandating more efficient vehicles. But that process is slow and politically difficult, he noted: “People don’t want to give up their cars.

The quickest, if perhaps far from the most politically palatable, approach is to boost prices through new taxes, he said. Higher prices at the pump, whether driven by producers or through taxes, is the most direct way to encourage conservation or the switch to more efficient vehicles, Fesharaki argued.

“One way or another, consumption has to come down,” he said.

Fesharaki acknowledged there are any number of pressures on the price of oil, and any number of sectors (such as electric utilities) affected.

The pressures include financial speculation, which has some short-term impact on the rise and fall of oil prices. But speculation within the financial markets does not represent a systemic impact on long-term prices, he said. Geopolitics, including the current situation in Iraq, Iran, Venezuela and elsewhere, also has a direct impact, but those forces change over time.

But when all that is sorted out, he said, the remaining and more permanent factor is supply and demand. World demand is growing exponentially, and supplies are either tapped out or being held back by oil-rich countries who want to preserve a sustainable source of income for decades to come.

Alternatives, including solar, wind, hydrogen, biofuels and more, have their place, Fesharaki said, particularly when it comes to producing electricity. But for the moment, the real crunch comes in fueling transportation, which remains very oil dependent.

“We have to change our lifestyles, there are no two ways out of it,” he said.



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