Take your pick: high gas prices or none at all

Hurricane Ike shut down a lot of refining capacity in the South, and the result is gasoline shortages and gas stations running out of gas.

One culprit: "gas gouging" legislation. Stations don't want to raise prices to reduce demand, so they run out of fuel instead.

What is price gouging?

Gas is up to $5 a gallon in areas affected by Hurricane Ike, prompting a lot of people to complain of price gouging.  But what is price gouging?  Robert Rapier writes about the issue, and feels that it's a question of intent - are prices rising because...

• inventories are short?
• or, because folks get greedy?

We're better off having $10 a gallon gas if it means there's still some in the tanks, than $4 a gallon gas with empty tanks.

My idea would be that the state government should institute an emergency gas tax of at least $2 a gallon during these kinds of natural disasters.  The increased price would help reduce supply shortages and the revenue can be given back as a per capita tax rebate or used for disaster relief. 

High oil prices explained - 1 chart

In addition to an excoriation of the ridiculous pagentry over oil prices on Capitol Hill, R-Squared provides the chart that explains it all. When world supply is lower than demand, prices go up. (R-Squared credits Optimist for this chart)

The savings in a smarter electric grid

Washington State has been trying a so-called "smart grid," where people have their major appliances wired to the grid to reduce electric use during peak demand times, lowering electric costs.

For example, when high demand drove prices up (as utilities have to turn on "peaking plants" to generate extra electricity), special electronics turned off the heat element in the dryer or the water heater, helping to level demand.

This system is a combination of price monitoring and time-of-use pricing, and it lowered household electricity demand at peak times by 15%. During extended periods of heavy demand, the system lowered usage by as much as 50%.

In general, the system only intervened about 1% of the time, but cut 15% off the owners' electric bill. Not bad for a one-time $1000 investment.

Are refiners holding out?

Robert Rapier does gas prices, this time investigating the long-term price pressures. His analysis of the theory that refineries are holding back gas to hold up prices provides a thorough debunking (and explains why OPEC countries often exceed their quotas).

Say that you operate a 200,000 barrel a day refinery. Margins are quite good right now - let's say in your area they are $20 a barrel. So, when the refinery is running normally, you are grossing $4 million a day. Would it make good business sense to cut your capacity in half - to 100,000 barrels a day? While such action would probably cause the overall price of gasoline to rise, it is going to have a disproportionate effect on your refinery. If margins go up to $30 a barrel (although there is no way taking 100,000 barrels off the market would impact margins to that degree), you are still $1 million a day worse of than you were. You have given up $365 million a year in order to reduce your capacity. You would have made an incredibly stupid business decision. In fact, you would be much better off if you could boost capacity by 100,000 barrels a day. Sure, prices might slightly drop, but your overall profits will be higher, especially in such a tight market.

Furthermore, you don't know if Shell down the street might be able to make up the production shortfall, pocketing the money that would have been made by your refinery. (Contrary to popular opinion, oil companies do not consult each other on such issues). You also don't know if exporters from Europe will respond. If they respond by boosting exports to the U.S., now they are pocketing the money that your refinery is losing. In summary, this is not a rational way to conduct business - unless your margins are negative. You would be making a decision that will certainly cut the returns at your refinery, while not knowing how your competitors will respond to the supply shortfall.

If we'd had the political will to increase gas taxes when prices were low, we'd be in a lot better shape right now, as gasoline demand would have been restrained by higher prices. Not to mention, we'd have more money for transit and highway maintenance.

The inanity of "price gouging"

I've blogged several times about the relationship between supply and demand and its effect on gas prices. Today I found (courtesy of R-Squared) two charts that should lay to rest any theory of price gouging (from testimony to the Senate Committee on Energy). The testimony also discusses how very low oil and gas prices in the 1980s led to underinvestment in refining infrastructure that is needed to meet today's surging demand. Without further ado, here are the charts which should explain why prices are high without "gouging."

Gasoline supply is historically low:

Gasoline demand is high:

Q.E.D.

Note: to my regular readers, apologies for the profuse use of the word 'inane' lately. It's a passing fad, I hope...

It's not boycotts that change gas prices, it's behavior

Americans are finally starting to grasp the meaning of higher gas prices, reducing driving and finding other ways to cut down fuel consumption.

Since 2005, Americans have driven 8 billion to 9 billion fewer miles per month than they would have if pre-2005 trends had continued, according to a USA TODAY analysis of federal data...One-third of those polled by USA TODAY this month say they have shortened or canceled a planned car vacation.

And yet, just a few days ago some folks were still attempting the inane gesture of a one-day gas boycott. Proposed for May 15, here's a view of how the proposed boycott worked:

Below are the closing prices for June gasoline on the NYMEX starting on May 14th:

May 14 $2.30
May 15 $2.30
May 16 $2.34
May 17 $2.42

I'd explain a bit more why this was completely ineffective, but blogger Robert Rapier (who also gathered the above data) is worth quoting verbatim:

If you really want to impact gasoline prices, you have to cut demand. You must actually cut your consumption. Instead of not filling up for a day, ride your bike to work or take public transportation during the next boycott. Those are measures that actually reduce demand, and will affect prices. But that's too hard or inconvenient, isn't it? We want to hold on to solutions like boycotting Shell, which will bring them to their knees. Do people really have such a poor understanding of supply and demand?

Amen.

The corner is turned, gas prices peaked?

The EIA's This Week In Petroleum, released today, shows that gasoline inventories finally increased last week, after falling for 12 straight weeks. Demand was also softer than last year, suggesting that prices may have peaked in the short run. The EIA predicts that prices will stay close to $3/gallon for most of the summer, assuming no interruptions in crude availability (OPEC issues) or refinery infrastructure (hurricanes).

Hurricane season begins June 1st, so it's wait and see.

Replacing gasoline: efficiency, alternatives or both?

Over at Energista they're examining a proposed state tax credit for alternative fuel vehicles in Minnesota, and I think Christopher's comments are worth examining. He decries a credit for alternative fuel vehicles because it can end up subsidizing the purchase of fuel inefficient cars.

The implied argument is that when it comes to developing energy independence, reducing overall fuel use is more important than alternative fuel capability. (It's also important to distinguish between a vehicle that's capable of using alternative fuels from one that is actually run on them - an E85 compatible car can also use straight gasoline)

That particular distinction is what makes this tax credit bad policy. Helping people buy an E85 car is counter-productive if they end up filling up with 100% gasoline. Furthermore, as this op-ed piece notes, tax credits tend to skew benefits toward upper incomes. Shouldn't we expect people of all income levels to help reduce gasoline use? And shouldn't we make sure that government incentives for alternative fuel use actually guarantee that use?

Instead, government could subsidize alternative fuel use - as the feds do, to the tune of 51 cents/gallon - making it more price competitive.

But what about the efficiency issue? Cheaper fuel, even alternative fuel, tends to encourage greater fuel use (although fuel demand is relatively inelastic). And alternative fuels will be able to displace more gasoline use if our overall use is lower. From that perspective, perhaps government is better off just increasing the price of gasoline with a gas tax (exempting alternative fuels like ethanol or biodiesel based on their proportion in our fuel - e.g. 10% off for 10% blend).

A gas tax with a renewable exemption can reduce overall fuel use and shift consumption to alternative fuels. To keep tax burdens equitable, the proceeds can be used to reduce taxes on the poor, who will otherwise be disproportionately burdened by increased gas taxes.

So, a tax credit that may be ineffective (and that will put a hole in the budget) or a gas tax that could be revenue-neutral? Tough choice...

Peak Oil: Exhibit A

The folks studying peak oil issues at The Oil Drum have a fantastic chart posted regarding Saudi Arabia's oil production. Despite record high prices during the past two years and a history of helping to soften price spikes with increased production, Saudi oil production has fallen steadily.

It may be the "smoking gun" that the Saudis have reached their oil production peak - quite a concern given that they represent 1/8th of world supply.

Peak Oil is not "empty"

Exxon Mobil CEO Rex Tillerson was recently interviewed on CNBC and from the summary in the Wall Street Journal's energy blog, it's clear that people still do not get what "peak oil" means.

Peak oil is when worldwide annual production of oil reaches its historical high and then declines. It means that we'll go from producing 80 billion barrels in 2009 to 79.8 billion barrels in 2010 (hypothetically), and then a little less each year thereafter.

The reason peaking production is just as problematic as if we were running out of oil is that world demand continues to grow steadily each year, and when supplies start declining the price will increase rapidly. Think of it like you would Dave Matthews Band. Before they were popular (low demand), there would have been no problem getting concert tickets (high supply). However, as their popularity grew, demand for tickets quickly outstripped even the largest concert venues (demand caught up to supply). Now imagine what would happen to the price of DMB tickets if they had to perform in a smaller venue each time they had a concert.

So that's Peak Oil. Here's what it isn't:

Peak oil is NOT "no oil." We'll continue to produce lots of oil, just a little less each year than before.

Peak oil is NOT "no new oil fields." We'll continue to discover new oilfields as technology advances, but just never enough to replace all that we're pumping out.

Peak oil is NOT "no new technology." We'll continue to find ways to extract more oil from existing fields and oil from shale, tar sands, and other weird places. But even as these become more feasible, they will still not be enough to replace existing oil production.

This chart gives a sense of why we're hitting peak oil. Note that the "peak" is actually the sum of many peaks. U.S. oil production peaked in the 1970s, Russia did around 1991, and Europe did in 2000. The worldwide peak will happen when the countries increasing production - like OPEC - can't make up for the declining supply from the rest of us, as well as increasing demand.



Image courtesy of Romaenergia, mirrored locally.