I don't know if energy costs will keep rising.  Nobody does.  Even with recent growth in China, India, and elsewhere, the US still consumes 25% of the oil produced world-wide, so a severe recession in the US could easily cut total demand enough to bring the price down.  Recession or not, I think the medium-term trend in energy costs is up.  Just in case I'm right, you ought to have plan for that.

I've written before about planning for expensive fuel.  I emphasized that you should have a contingency plan either to take money from other budget categories to pay for expensive fuel, or else to reduce your fuel use significantly.  That was short-term planning, though.  This time I want to talk about longer-term planning.

Some people still think that the recent surge in oil prices is a temporary aberration, and that oil prices will return to "normal" (whatever that is).  Plenty of people think that recent prices reflect genuine underlying trends--supply restrictions from many sources together with persistently rising demand from all over the world--but that prices will reach a new equilibrium and stabilize.  Some people, though, think that those underlying trends are likely to keep pushing prices up

What's your plan, if that third view is correct?

It's hard to plan in a vacuum, so let's put down some numbers.  The average price of gasoline (unleaded regular) was $2.59 in 2006.  The price yesterday at my local gas station was $3.799.  If prices continue to rise at that rate, we'll see $10 gasoline within 5 years.

I'm not saying that's the most likely scenario--everybody knows the dangers of assuming that recent trends will continue in a straight line--but it seems to me like a perfectly possible scenario.

Most reporting on possible price trends in gasoline has recently accepted the notion that $4 gasoline is a foregone conclusion and is starting to talk about $5 gasoline as a scary boogyman.  I'm urging you to look ahead a bit further.  Gasoline at $5 a gallon is not the scariest boogyman out there.

And remember, if gasoline prices keep going up, other energy costs will be moving up as well.  Diesel, propane, and other fuels that come from crude oil (like heating oil, kerosine and jet fuel), face very similar production constraints and very similar demand situations, so they'll probably move up just about like gasoline.  Electricity and natural gas are different, but high prices for oil will encourage anyone who can to switch to alternatives, so there'll be upward pressure on all all energy costs.  Wind, solar, and biofuels will increase as a fraction of the mix, but I don't expect them to amount to enough to hold down prices.

It's not as hard to adapt to high energy prices as you might think.  Look at western Europe:  Due to high taxes, they've had gasoline prices of $8 to $10 a gallon for some time now.  The result hasn't been as drastic as you might expect.  People still have cars, they're just smaller and more fuel-efficient.  People still drive to work, although few people drive as far as a lot of Americans do and a lot more use mass transit in some form or another.  People walk more and bicycle more, and because more people get about that way, the infrastructure tends to support it better.

That's the outline of a plan for you:  Switch to a more energy-efficient car.  Move closer to work (or find a job closer to home).  If you move, move to a smaller house.  If you don't move, improve your insulation.  Walk more; bicycle more; organize a car pool; figure out how the bus system works in your town.

Make a plan.  You don't have to act on it--even if prices keep rising, they probably won't rise in a straight line like that.  But even a sketch of a plan gives you an outline for some serious thinking:

  • At what fuel price would you switch to driving a smaller, more fuel efficient car?  How much would that car cost?  What would your old car be worth if you tried to sell it then?  On both the buying and selling side, be sure to take into account the price pressures of lots of other people doing the same thing.  (I just saw a story that the resale value of SUVs has already collapsed.) Whatever your plan is, you should have enough cash on hand to put it into effect.
  • How would you heat your home if fuel prices doubled or tripled?  Selling it and moving to a smaller house isn't the sort of thing you can just do--you need enough lead time to identify a new house and to sell your old one (or rent it out).  And, again, you need to have enough cash on hand to put the plan into effect.  If moving isn't the plan, what else would you do?  Turn down the thermostat?  Close off rooms?  Estimate how much fuel you could save and make some notes--that'll be useful information later.
  • If you wanted to use mass transit, do you know how?  Do you know where the bus stop is?  Is it possible to get to the office or to shopping from where you live?  What bus would you take?  Would you have to change buses?  (Ditto for subways, trollies, light rail, or whatever you've got.)
  • Is telecommuting an option for you?  Even if your boss would object, if your job could be done remotely, you ought to include it as a possibility in your plan--bosses who don't like the idea of remote employees might well come around if their only other options are paying big raises or having employees quit because they can't afford to drive to work.  Start figuring out what hardware and software you'd need to telecommute.  Learn how to use it.
  • Is your job at risk?  Or, if you own a business, are its profits at risk?  Rising energy costs would hit everyone across the economy, but some industries (trucking, airlines, aluminum) will be hit much harder than others.  Take a look at your own situation and adjust your plan accordingly.

One more thing to allow for in your plan:  Shortages.  When constituents are faced with high prices, politicians try to "do something."  Most of the things that governments tend to do in those situations (price controls, rationing, laws against hoarding) tend to produce shortages.  The market system is pretty well established in the US, so I expect we'll see high prices rather than long-term or widespread shortages, but your plan ought to allow for the possibility of hearing "No gas today" from time to time.

People are very attached to their big cars and big houses; they're not going to give them up--and I'm not asking them to.  What I'm suggesting is that people think seriously about how they'd adapt to higher energy costs and be prepared with a plan, just in case higher energy costs are what we get.  The last time I wrote here about the possibility that fuel prices might get really high, more than one commenter seemed to think I was talking about a real disaster scenario--going so far as to say, "If things get that bad, a lot of people are going to die!"  I'd like to gently suggest that the adaptations to $10 gasoline are perfectly possible and almost universally non-fatal.  Having a plan will help.