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.

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.

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.
   

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.

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.

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.

Okay, how about a user fee for driving?

Over at Environmental Economics, author Tim Haab has an evaluation of a usage fee for automobiles based on mileage and fuel economy. His proposal is to charge vehicle owners the inverse of their EPA city fuel economy per mile driven. The fee would penalize owners with larger and less fuel efficient vehicles, as well as having people pay a fair price for their road use.

So consider two car types: a gas guzzler (GG) and a fuel efficient car (FE). Suppose the gas guzzler has an EPA MPG rating of 15 mpg city and the FE car has a rating of 35 mpg city. The per mile fuel efficiency payment for the gas guzzler will be $0.067 per mile drive (1/15) and the per mile fuel efficiency payment for the fuel efficient car will be $0.029 per mile driven. If a driver of each type of car drives 12,000 miles a year, the GG driver will pay an annual fee of $804, and the FE driver will pay an annual fee of $348.

Seems reasonable, eh? This proposal even comes from a self-confessed SUV driver. On the political probability side of the coin, making this a usage fee may make it more appealing to anti-tax crusaders. Of course, this proposal requires a system of inspection stations to mark down annual mileage and assess the fee. So is there a less bureaucratic solution? Yes.

I'd like to point out that the fuel efficiency payment is algebraically identical to a $1/gallon GAS TAX** that many economics [sic] including John and me think would go a long way toward solving many of the transportation related externalities.

**Multiplying the FEE=$(1/(miles/gallon)) by miles driven gives $Fee*miles=$1/gallon.

In other words, if we want to encourage use of fuel efficient vehicles and charge drivers for their use of the road, raise the gas tax. It's the free market, stupid.

Gas prices still rising

The U.S. average price of gas has hit $3.07 and tomorrow's report from the Energy Information Administration (EIA) will prove another crucial hint as to the further direction. So far, breaking the $3 barrier has proven insufficient to stop the steady increase in gasoline demand. As mentioned previously, gasoline stocks are already at historic lows and Americans haven't begun cutting back enough to compensate nor have refineries been able to keep pace. This chart from the EIA shows how demand is keeping the pressure on prices:


Ironically, the WSJ Energy Roundup notes that the EIA projected a high summer price for gas of $3.01, but with that mark behind us, we're in unknown territory.

For more on the factors behind the high prices, check out this post. And combine trips, will ya, I still have to drive to work! :-)

Update on gas inventory and prices

I blogged recently about $4 per gallon gas and the evidence for it keeps piling up. Robert Rapier investigates the U.S. weekly petroleum report and he's been hopeful that gasoline inventories would turn around in recent weeks to build up for the summer season (and help moderate prices). It hasn't happened.

On a days of supply basis, this week's inventory number is the lowest we have ever seen in the spring, prior to peak summer driving season (emphasis mine).

Summary of the price pressure:
1. It's a supply problem. Refiners have simply not kept pace with gasoline demand as they've been switching to summer gas formulations.
2. It's not an oil shortage, it's a gasoline shortage. Oil stocks keep rising.
3. Demand continues to surge up despite already higher prices.

In other words, get your checkbook ready - prices are going up (price chart courtesy of GasBuddy.com):

Ready for $4 a gallon? This summer?

A daily read for the energy-interested, the R-squared Energy Blog has something for everyone today: your gas prices are likely to jump - a lot.

Analyzing the weekly petroleum report from the Energy Information Administration, Mr Rapier notes that in 99.2% of weeks going back to 1991, we've had larger gasoline inventories (as measured by # of days supply). Typically, refineries kick up production to prepare, producing more gasoline to help meet peak demand season (summer). This spring, they haven't been able to keep pace, and gasoline inventories missed all expectations by falling this week, by several million gallons.

Demand steady, supply down. Get ready.

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...

Stop whining about gas prices

Courtesy of a blog I've taken up reading, Energista, is an argument about why "hunting around for cheap gas is possibly the dumbest way [to save money]." Analysis originally from Omninerd.