If you drove up to the pump tomorrow and saw that gasoline had hit over $2.50 a litre, you’d have to start acting as though you lived in a remote Alaskan village, where $10-a-gallon ($2.64-a-litre) gasoline is already a reality.

You’d still fill your tank, because you’d have important places to go. You couldn’t stop using gasoline completely, just as people living in rural Alaska can’t. There, they need gasoline and diesel fuel to heat homes, generate electricity and run the four-wheel-drive vehicles they use to hunt caribou, moose and birds.

Caribou hunting probably isn’t on your to-do list, but your grocery items – unlike those animals in the Alaskan bush – would cost more once you got to the store.

So you’d perform the same difficult balancing act people in Alaskan villages do: cutting back on other expenses to be able to keep driving to the places you needed to go.

It wouldn’t be fun. At $10 a gallon, you could pay $310 to fill the tank on your Chevrolet Suburban. Even a fill-up on a Honda Civic could cost $132.

Less money for other things

“It’s hard for people to stop using fuel,” says Fred Rozell, the director of retail pricing for the Oil Price Information Service, which tracks gas prices at more than 100,000 stations around the U.S. “They must still drive to work. They can only do so much telecommuting or carpooling. Most driving is still needed, and people make up for the increased cost in other areas of their lives.”

There would be less money for other goods – food, clothing, building materials, etc. – and those items would be more expensive, because companies would pass on their higher transportation costs to consumers, says Troy Green, a national spokesman for AAA.

How much more expensive? Todd Hale, a senior vice president at research company Nielsen, says $10-a-gallon gas could boost the U.S. inflation rate to 10%. The result would be devastating to the world economy and to the global food situation, he says.

In the U.S., the restaurant business would be the first to see the reduction in spending as people cut back on how often they ate out, says Rozell. That probably would cause some restaurants to go under.

The grocery business would then see the effects, as shoppers switched from premium to store brands, used more coupons and waited for sales.

The actual cost of groceries would go up, but food prices would not follow in lock step with fuel costs. In 2008, for instance, the price of fuel oil rose more than 30%, and gasoline went up almost 20%. But the increase in food prices was only 5%, compared with 4% the year before.

Another statistic from the U.S. Department of Agriculture might explain that: A little less than 7% of the consumer dollar spent on food goes to energy. But that 7% represents a 75% increase from 1998. Further, Joseph Glauber, the chief economist for the USDA, in a speech Feb. 24 predicted a “stronger increase” in retail food prices in 2011 because of higher energy and commodity prices.

Especially hard hit by $10-a-gallon fuel would be trucking companies and airlines, which started announcing fare increases Feb. 25 in reaction to their rising fuel costs.

“When oil hit $145 a barrel in 2008,” AAA’s Green says, “that started the airlines’ move to charge for services that had been complimentary – checked baggage, drinks and food on board, charges on ticket changes. With those charges already in place, you have to ask, ‘What next?’”

Package delivery companies such as United Parcel Service know what would be next: fuel surcharges. They used them in 2008, and if diesel were to hit $10 a gallon, a package that previously had cost $100 to ship would cost $120 to $130, reflecting the surcharges.

The effect wouldn’t be as immediate for in the cost of postage, but the added cost would be in the mail, so to speak, and due to arrive about a year later. That’s because the rates on first-class letters and mailed advertisements – post office’s largest sources of revenue – have to go through a regulatory process before they can be raised. The post office, already struggling as consumers shift to electronic communications and as recession-battered advertisers stop mailing, would operate at a deficit for a year or so before mailing costs could be adjusted to cover the higher fuel costs – if that were possible.

A one-cent movement in fuel prices increases costs for the U.S. post office by $8 million annually, or $667,000 a month, according to Greg Frey, a Postal Service spokesman. So if prices rose $1.50 per gallon (40 cents per litre), from, say, $3.50 to $5 (92 cents to $1.32), fuel costs for the U.S. post office would increase by $100 million per month. A sustained period at $10 a gallon for gas would add billions in fuel costs. Frey says another risk also would be inevitable: “During the recent recession, the USPS experienced significant declines in mail volume and revenue. Should the U.S. economy slip significantly again due to spikes in fuel prices, it would certainly again adversely impact our revenue and cost base.”

Regular will become more regular

When gas prices rise, consumers also change the way they buy fuel. The percentage of regular gas sold goes up with the price of gas. The less expensive gas had been a steady 65% of sales, Rozell says, but spiked to 90% when gas hit $4 a gallon ($1.06 a litre) in 2008.

Buying gas also might not be as easy as it is now. Gas stations would beef up security because gas theft is always a bigger problem when prices go up, says Hale, of Nielsen.

“Pay inside first” would be a minimum step toward tighter security. Stations might do away with self-service pumps or devise barricade or key-card systems to restrict entry and exit at stations.

Car buying is also subject to change. As gas prices increase, sales of SUVs and trucks decline, AAA’s Green says, and sales of more fuel-efficient vehicles go up. But consumers have shown a short memory when it comes to higher gas prices, and the auto-buying trend goes in reverse when fuel prices stabilize or start going down.

Green says higher prices foster more petroleum development – “not just domestically but globally, where you find countries trying to develop the next big oil field.”

But in the U.S., that could be held in check by reaction to the 2010 Deepwater Horizon explosion, which left 11 people dead and spilled millions of barrels of oil into the Gulf of Mexico.

A move toward alternatives?

Gasoline at $10 a gallon could also make people change the way they think about hybrid and electric cars.

“According to all the polls, the most important reason that more people don’t buy these vehicles is that they cost too much,” says Denis Hayes, often recognized as the founder of Earth Day and now the president of the Bullitt Foundation, a Seattle organization supporting sustainable communities in the Pacific Northwest. “Assuming people are being honest with the pollsters … the savings in fuel costs would more than make up the difference of the initial cost.”

Bike and motorcycle sales would also go up. “Many people would decide they could live with two wheels instead of four,” Hale says.

He says that gas prices at $10 a gallon might be “what gets us over the hump in terms of realizing our dependence on petroleum.”

“We would have to find alternative sources of energy, which would improve our position in the world economy, since we would be keeping more of it here instead of going elsewhere to import oil.”

The reaction to high gas prices in Alaska has been an effort to find other energy sources.

“Alternative energy – hydro, wind, biomass – can offset 20% of total energy needs” in Alaskan villages, says Bruce Tiedeman, the rural outreach coordinator for the Alaska Energy Authority, “and some communities are close to getting away from 100% dependence on petroleum.”

Even though Alaska has extensive oil resources, most of the state’s heating and power needs are met by diesel delivered from the Lower 48 states. The oil may come from Alaska, but most of it is transported to California to be refined and then shipped back to Alaska. Many remote communities bring in their fuel by barge or rely on air tankers to deliver it. Thus, the $10-a-gallon gas.

Bruce Wright, a senior scientist for the Aleutian Pribilof Islands Association in Alaska, can tick off a list of projects aimed at the association’s goal of establishing at least one large renewable energy project in each village: hydro and geothermal projects in Akutan; a hydro project in Atka scheduled for completion next fall so the diesel generators can be turned off; plans to expand a hydro project in King Cove; a wind project in Nikolski that could offset diesel use by 50%; geothermal in Unalaska; new wind turbines at Sand Point and three now operating at St. Paul.

Coming to a pump near you soon?

The U.S. Energy Information Administration expects regular U.S. gasoline retail prices to average $3.15 per gallon (83 cents per litre) in 2011, 37 cents per gallon (10 cents per litre) higher than in 2010. The EIA forecasts $3.30 a gallon (87 cents a litre) in 2012. But the agency says the national U.S. monthly average retail price for regular gasoline could exceed $3.50 per gallon next summer, with a 10% chance it will rise to more than $4 per gallon ($1.06 per litre). Mostly that’s due to increasing crude oil prices.

If gas does go to $10 a gallon ($2.64 a litre) in the near future, it will be because of how OPEC nations set production rates as the world economy recovers and demands more oil. Or, according to the EIA, it may be because of China’s growth and its currency policies. Or the unrest in such places as Libya and Bahrain could keep spreading to other countries in the Middle East that supply the world with oil. Blend together all of the above, and you might pull up to the pump one day soon and find gas at $10 a gallon.

By: By John B. Saul

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