It's hard not to notice the recent drop in gasoline prices. Which has a lot of readers wondering: How much lower are they headed?
If the cost of crude oil has gone down almost 18 percent in the last couple of weeks, how come gas prices haven't dropped as fast?
— Bruce W., Address withheld
If refiners are still running at — or near — capacity, and supplies of gasoline are tight, prices won’t come down. Each market for a specific product — gasoline, heating oil, diesel, crude oil — moves to some degree to the supply-demand balance for that commodity.
So the cost of crude has a lot to do with the rise in gas prices — but it’s not the whole story. As ethanol has become more widely used as an additive to help reduce smog, for example, the price of ethanol has become another factor. But the biggest factor is demand at the pump.
Until recently, refining capacity was expanding barely fast enough to keep up with demand. (Even though no new refineries have been built in the 30 years, refiners have been steadily squeezing more production out of their existing plants to keep up.) And consumers were willing to keep paying for gas as prices rose: Americans are spending roughly three times as much on gas as they were six years ago — or about $1.5 billion a day, according to Tom Kloza at the Oil Price Information Service.
The good news is that it looks like those high pump prices have begun to ease demand — as people figure out how to use less gas — and so prices have fallen. Since July 10, wholesale gas prices have fallen by about 55 cents a gallon on the East Coast, 40 to 45 cents in the Midwest and by 40 cents on the West Coast, according to OPIS.
Kloza figures that as the savings from the lower cost of crude flow through the system, we can expect another 10 to 20 cents a gallon of what he calls “catch-up” price weakness at the pump. The price drop for diesel has been even bigger, according to OPIS; wholesale prices for those products are down by 80 to 90 cents in less than a month.
The bad news: If prices keep falling, and we all go back to using more gasoline again, that will put more pressure on supplies and send prices higher again.
So our hope — one shared by a growing number of readers — would be that we get serious about finding another way to power our cars. Our personal favorite is all-electric vehicles, plugged in and recharged at night when power demand is low. Several car makers say they’ll have all-electrics available by 2010.
The trick will be coming up with a battery pack that can keep going far enough for a long range trip. Some battery makers are working on making these take a 75 percent recharge in about the time it takes to top off a tank of gas.
I still have about 20 years until retirement. While I've heard a lot about the health of Social Security and questions about what it will look like by the time I retire, I haven't heard anything about the health of Medicare. Is it projected to remain solvent 20 years from now? Do health care companies offer "pre-retirement" health insurance I can invest in now so that I won't have to pay out the ear to supplement Medicare once I'm retired?
— Steven, Reno, Nev.
Like any retirement plan, Social Security needs an update from time to time, and its overdue for one now. But if Congress and the White House can make some relatively minor fixes soon (just as Ronald Reagan did in the mid-80s) there’s no reason Social Security can’t go on supporting retirees for another 75 years.
Medicare is a different problem: It’s seriously broken and at a much greater risk of going broke. Part of the reason is that the U.S. health care system continues to pile on expenses without any effort made to reform the way it’s financed. In its current state, it’s just not sustainable for another generation. Everyone seems to agree on the basic problem, but the system is so complicated — much more so than Social Security — that it’s much harder to agree on solutions.
Trying to protect yourself now with insurance is problematic. The most popular form of “pre-retirement” insurance is a policy that covers long-term health care. In theory, you buy now at a relatively healthy age, and your premiums are held to manageable levels as you get older. The policy kicks in for long-term illnesses after a certain period (30, 60, 100 days — think of it like a deductible) and then pays the cost of long-term care in a hospital or other facility. In theory, this protects you and your family from financial ruin in the event of the need for extended care.
That’s when things get complicated. A serious acute illness — like a major operation — is usually not covered. While the policy may limit premium increases, there’s no guarantee that base rates (those that apply to everyone in a given state) won’t go up faster than you expect.
The result is that, if the income from your retirement savings don't keep up, you could find yourself unable to keep up with the premiums as you get older — just when they need the coverage. That would mean you'd have paid premiums for 20 years — and end up with no coverage. (Some policies include riders that pay you back some of the premiums if you cancel, but this only increases the cost.)
Once they reach 65, many retirees who are eligible for Medicare buy “supplemental” policies to fill in the gaps of what’s covered. As the system gets stretched further, it’s likely that these coverage gaps will widen. So the best strategy might be to set aside your own “health care premium” fund that you use to purchase coverage when the time comes.
An even better idea would be to press your Congressional representatives to get serious about fixing Medicare and health care insurance generally. Unless and until we do, the cost of reasonable insurance for retirees is just going to keep going up — whether it's paid for by Uncle Sam or our retirement savings.
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