How can we fuel our future wisely?

Economist looks at a few real-world solutions

by Charmaine Daniels

John Zerillo

We have to move boldy if we want to lessen our dependence on foreign oil," business professor and economist John Zerillo warns.

Business professor John Zerillo was asked recently to predict the cost of gasoline 10 years from now. “Probably over $10 a gallon,” he replied.

Although oil prices dropped temporarily this fall because of less consumer demand amid concerns about a global recession, economist Zerillo says they will go back up. “The overall total supply of oil is diminishing and as the demand rises exponentially – primarily because of the growing economies of China, Russia and India – a dramatic increase in the price of oil is inevitable,” he states. Drilling for more oil might work for the short-term, but the long-term answer is new public policies and alternative fuels, he explains.

Are fuel costs connected to the overall financial crisis that unfolded this fall?

“In the financial world, everything is connected,” explains Zerillo. When energy prices go up as they have for the last several years, food prices often follow and there is less money to spend on other things like housing, for example. People can fall behind in their mortgage payments or they can’t buy new homes, both of which affect the current financial crisis. When fewer people buy houses, the value of houses goes down, and declining equity in the value of houses is fundamental to the current crisis.

“Declining equity means that banks frequently lose money through foreclosures because they can’t sell a house for the same amount as the original mortgage,” Zerillo notes.

In other words, though the rise in fuel prices over the last several years didn’t cause the financial crisis, it exacerbated it. In the long term, we need to decrease our dependence on foreign oil much as Europe did, says Zerillo. (Gas in Norway and Sweden already costs $10 per gallon, and is $6.50 per gallon in Italy.) The Europeans tax gasoline at a higher rate and put part of the tax money toward mass transportation, which in turn lowers dependence on foreign oil and results in less per capita gas consumption. Networks of trams and trains are fast and reliable. In Rome, the city center is off limits to non-resident cars after a certain hour, and cameras track violators.

Robert Zilg ’76, a vice president at Metropolitan Life Insurance Co. in New York, recalls that when his company sent him to Poland five years ago to open up new markets, the subsidized buses and trams were inexpensive in Warsaw, while gas was $4 gallon there even then.

The price of oil and gas will continue to climb higher as overall global demand for it increases. Zerillo predicts China could double its energy needs in the next five years and India in the next seven years. India will soon produce a $2,000 car, which will “skyrocket the need for gas and oil in Asia,” he says.

Zilg says that the world has become much more connected over the last 15 years as the amount of global trade, paired with immediate information access, speeds the impact of any economic trends or tremors.

Zerillo claims programs encouraging mass transportation or use of alternative fuels will have to come from government, because corporations are understandably concerned with shareholders and short-term profits, not what will happen in 15 years. “Much like Europe, government initiatives might be needed to nudge the free market for society’s good,” he notes.