Why gas prices are heading north

Gas prices have gone up again recently, even as crude oil stocks in the U.S. have been growing. Robert Rapier reveals why.

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. 

Costly gasoline hurts exurban house prices

The big lot and spacious house doesn't seem so great when you have to drive your 12 mpg Denali 45 miles each way to work.  The Washington Post has some great graphics showing how housing prices in the core of DC have increased while the housing crisis is gutting exurban prices by 26% in the past year.

Only $30 million for our energy future?

The U.S. spends $30 billion a month on oil imports, but only ponied up $30 million (with an 'm') to research plug-in hybrid cars, our best chance to reduce our reliance on oil.

Hmm. Nothing to do but count the days.

The SUV is dead

Gas is $4 a gallon and the SUV is dead.

Industry watchers predicted sales of passenger cars would surpass those of trucks within in a couple of years. Instead, it happened almost overnight...Need more proof the SUV is a goner? Ford's venerable F150 pickup ended its 17-year-run as the best-selling vehicle in America last month, dethroned by the Honda Civic and three other Japanese sedans.

Good riddance.

Getting over 100 MPG!

An Ontario blogger got to borrow a plug-in hybrid Prius over the last week and he regularly got over 100 mpg! Driving on electricity is the way to go!

The gas pump Y2K bug

An amusing story on analog gas pumps - those old things you see in front of a small-town general store. Apparently, these pumps can't be set for a price higher than $3.99 a gallon, so when the actual price gets there, they have to be shut down.

The entertaining tidbit was this, from an interview with an owner of a set of these older gas pumps:

"If it gets too bad, maybe we'll just pull" the pumps out, said Hammett, unnerved by a recent TV program with apocalyptic predictions of $8-a-gallon gas.

OMGWTFBBQ - $8.00 a gallon? That's almost as much as they pay in Belgium, and France, and Germany, and Italy, and the Netherlands, and the UK...

Thought experiment: replacing gas with solar power

No, not rooftop panels for your Prius, but using a lot of solar panels to make electricity to drive electric cars. Robert Rapier's analysis tries to uncover how much solar it would take to supplant gasoline (if we had the battery technology to drive on electricity only - we may, actually - the GM EV-1 got 75-150 miles per charge, more than enough to commute on).

How much land area do we need for PV panels? 36 x 36 miles.

How much would 444,000 MW of solar PV cost? $1.8 billion
(if you believe the price Southern California Edison is forecasting for their upcoming solar project). Even at double the cost, that's less than 0.1% of the federal budget.

Gas prices: we're 111th highest!

Out of almost 200 countries, the U.S. has the 111th highest gas prices. But we use three times the oil per capita of our European counterparts, who responded to the oil shocks of the 1970s with steep taxes that have kept demand level. Americans, on the other hand, went nuts with far-flung suburbs and big-ass cars.

How's that Hummer feel now? Patriotic?

Five things our next president must do on energy

From Robert Rapier at R-Squared

1. Raise gas taxes by $2 a gallon, offset by income tax rebates
   
2. Rebates for high-efficiency vehicles, penalties for low-efficiency ones.
3. Find renewable energy substitutes that do not rely on fossil fuel inputs.
4. Extend tax credits for solar, geothermal, and other pure renewables.
5. Increase funding for research on converting to an electric-driven transportation system.
   

With higher gas prices, a hybrid pays off

You can make back the hybrid price premium in gasoline savings within a year, depending on your driving habits.

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.

Gas Prices 101

Here's a very thorough analysis of the source of high gas prices. He uses the word "gouging," but only in debunking that theory. The conclusion?

But it looks to be the rule, rather than the exception, that higher gasoline prices are here to stay. A return to sub-$2/gal gasoline appears highly unlikely (again, some seasonal exceptions are possible).

Iran teaches us supply and demand

Iran is - ironically - providing the United States with a supply-and-demand lesson, if anyone's paying attention. Yesterday the Iranian government increased gas prices 25% (from the ridiculously low 40 cents per gallon) to help reign in surging demand for fuel. It's not sufficient, of course, when the rest of the world is paying 6-10 times that price, which is why Iranian fuel rationing will begin in two weeks.

So when Americans worry about price gouging, we need to consider the alternative. If we artificially limit the price of fuel, demand will stay artificially high, and we will run out. As R-Squared Energy blog puts it:

In times of shortage, price needs to rise to choke off demand. I may like to go visit my Aunt Bettie in the midst of this emergency, but I can put that trip off. However, if you have a dying relative, the price is not going to stop you. But you will be glad that it stopped me, and others whose need was not critical, from draining supplies.

The Iranians are going to learn very quickly that in a supply-constrained world, charging less than market price means there's not enough to go around.

Tuesday roundup

I've been hit with my oft-acquired late spring cold, which in addition to my newly acquired (or acknowledged) allergies made for quite the cap on my weekend. All-in-all, it's created a less-than-stellar environment for blogging (staying home sick from work is an excuse to stay off the computer).

At any rate, here's a link or two to things I've found interesting while being unable to blog more thoroughly:

• The U.S. Congress is considering "price gouging" legislation. Blogger Robert Rapier has a nice explanation of how legislation like this will accomplish one thing: gas shortages.
• Modern Dragons has an interesting tidbit on the way naming a female child can impact their future interest in math and science.
• Dead Racist Weekly has debunked the obituary theory that Jerry Falwell and other evangelicals got political because of Roe v. Wade. It was actually the proposal to remove their Christian school tax exemption that got the masses uppity.
• GM has recently done more tests with a hydrogen car, but has yet to answer the question of where people will tank up these concept cars. In case anyone is wondering, GM was the maker of the all-electric EV1, which could refuel by using electricity (exercise: count the number of gas stations with hydrogen pumps. Now count the number of gas stations with electricity. Which fuel of the future seems more likely?)
  

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.

Relatively speaking, gas is cheap...so far

Cockeyed.com explores the "price of a gallon," and shows that gasoline still remains among the more inexpensive liquids that Americans use on a daily basis. A Budweiser, for example, sets you back almost $9/gallon and it won't get you near as far as a gallon of gas.

Despite the comparatively favorable economics, this week's petroleum update shows that gasoline inventories remain near historic lows, meaning Americans will likely continue to pay north of $3.00/gallon for gas all summer. This price level will be the minimum, however, and could surge significantly higher if hurricanes or breakdowns cause unplanned refinery outages.

For Americans feeling sorry for themselves, here's a second reality check. Gas prices in many European countries are hovering near $7.00/gallon.

Should revised mpg mean a revised CAFE standard?

The Corporate Average Fuel Economy (CAFE) standard for American vehicles has required that each car manufacturer reach an average fuel economy standard for their fleet of vehicles: 27.5 mpg for cars, 22.2 mpg for light trucks. However, you may have noticed recent news about the EPA having overestimated - for some cars, drastically - the average fuel economy of the nation's vehicles.

Apparently, there are three different fuel economy figures. From the National Highway Transportation Safety Administration (NHTSA):

[There are] three different sets of fuel economy values- NHTSA’s CAFE values, EPA’s unadjusted dynamometer values, and EPA’s adjusted on-road values:

• NHTSA’s CAFE values are used to determine manufacturers’ compliance with the applicable average fuel economy standards
  
• The EPA's unadjusted dynamometer values are calculated from the emissions generated during the testing using a carbon balance equation. EPA knows the amount of carbon in the fuel, so by measuring the carbon compounds expelled in the exhaust they can calculate the fuel economy.
  
• EPA’s adjusted on-road values are those values listed in the Fuel Economy Guide and on new vehicle labels, adjusted to account for the in-use shortfall of EPA dynamometer test values. (formatting mine)
  

The NHTSA values are the law for the manufacturer, but the manufacturer's fuel economy average is computed via one of two methods:

EPA is responsible for calculating the average fuel economy for each manufacturer. CAFE certification is done either one of two ways: 1) The manufacturer provides its own fuel economy test data, or 2) the EPA will obtain a vehicle and test it...using the same laboratory test that they use to measure exhaust emissions (fuel economy standard #2 from above).

This laboratory test has always been modified down to better mirror real world fuel economy (#3), so the CAFE standard has apparently been overestimating actual average fuel economy of the American fleet for years.

Bring that story up to date with this fact: the EPA estimate of on-road fuel economy has also been overestimating mpg for American cars, by as much as 50% (link discusses hybrids, but the overestimate applies to all vehicles). So, to summarize:

Actual fuel economy <>

If conserving fuel means saving fuel in the tank, not just on paper, then we need a CAFE test and a CAFE standard based on reality.