Gas Prices Explained

Solving the deep mystery of gasoline price fluctuations

Good news for American drivers! Just in time for the Labor Day weekend, gasoline prices are falling. According to the Energy Information Administration (EIA) gas prices peaked in the spring. Gas prices usually rise in the spring because of the supply constraints created by the switchover to specially formulated summer gasoline mandated by the Environmental Protection Agency. The EIA reports that in May the average price for a gallon of regular got up to $2.87. Since then prices have been wiggling downward to around $2.65 per gallon today.

So what determines the price of gasoline? Speculators? Evil conspiring oil companies? Well, actually no. It's demand and supply, of course. On the demand side the American automobile fleet gets better gas mileage than it did a few years ago and Americans, whacked by the recession and high unemployment rates, are driving a bit less than they used to. In addition, thanks to government subsidies, about 9 percent of what goes into our gas tanks is ethanol produced from corn, which also reduces the demand for refined crude. On the supply side, global oil supplies are ample and refiners in the U.S. evidently believed the Obama administration’s rosy “recovery summer” scenarios and stockpiled a lot of gasoline.

So what will happen to future gasoline prices? Let’s review a little a bit of history. World oil prices peaked at about $147 per barrel in July 2008—the highest price ever for crude. Earlier, in May 2008, the investment bank Goldman Sachs issued a report suggesting that a “super spike” would push oil prices above $200 per barrel by 2010. That didn’t happen. Oil prices began a steep decline as the global recession came on. By November 2008, Goldman Sachs had recanted its super spike projections and was predicting that oil could fall as low as $50 per barrel. Actually oil prices collapsed to just above $30 per barrel by December 2008.

In short: Gasoline prices follow the trajectory of oil prices (plus an additional premium due to fluctuating constraints on refining capacity). On July 14, 2008, the Energy Information Administration reported that gasoline prices in the U.S peaked at $4.05 per gallon, up from the low of just 88.5 cents in February 1999 ($1.15 in 2010 dollars). In inflation adjusted terms, the price of a gallon of gasoline in 1999 was the lowest ever in history. Why? Because the price of crude had also fallen below $10 per barrel, its lowest level in real dollars since the end of World War II.

When oil prices collapsed in 2008, the average price for a gallon of gasoline dropped to $1.59 in December, which is just about where it was in December 2004, when the price of petroleum then also hovered in the mid-30 dollar range. Since the crazy price swings of 2008, oil prices have rebounded to between $70 and $80 per barrel. Today, average gas prices are actually slightly below where they were when oil was at about the same price back in September 2007.

So what can American motorists expect for future gas prices? As we’ve seen it all depends on the price of oil. Earlier this year, the international insurance syndicate Lloyd’s of London issued a rather bearish report [PDF] suggesting that “a spike in excess of $200 per barrel is not infeasible” around 2013. “An oil supply crunch in the medium term is likely to be due to a combination of insufficient investment in upstream oil and efficiency over the last two decades and rebounding demand following the global recession,” states the report. “This would create a price spike prompting drastic national measures to cut oil dependency.”

On the other hand, Cambridge Energy Research Associates (CERA), one of the world’s leading oil supply consultancies, rejects the notion of imminent “peak oil” and projects a more bullish production increase from about 85 million barrels per day now to over 115 million barrels per day by 2030. Afterwards, the CERA analysts foresee global oil production reaching an “undulating plateau” lasting for several decades, perhaps until 2070, before it begins a permanent decline. In addition, the CERA report speculates that “peak demand” could happen before peak oil is ever reached. Demand for oil peaked in the developed countries in 2005 and the CERA analysis notes that over the next decades improvements in areas ranging from automobile engine technologies and the electric battery to changes in demographics and values could significantly lower the projected demand for oil.

The key variable to keep in mind when looking at future oil prices is how much spare production capacity is available globally. Spare capacity prevents and cushions price shocks. During the 2008 price run up, global spare oil production capacity fell to as low as 1 million barrels per day. According to CERA, current spare capacity is a comfortable 6.4 million barrels per day. However, like the Lloyd’s analysis, the CERA report worries that persistent underinvestment in production combined with recovered global economic growth could lead to a tightening of supplies by the middle of this decade resulting in higher prices.

So there you have it, expert opinion suggests that oil prices, and thus gasoline prices, will fluctuate based on demand and supply. Now fill up your tank and drive somewhere to enjoy your Labor Day weekend.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

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  • jasno||

    Can we dispense with the 9/10ths bullshit already?

  • Night Elf Mohawk||

    Sure, as soon as you advertise $2.50 per gallon next to my $2.49 with the little 9 after it, just to see how it goes.

  • Some Guy||

    There is a circle outside of my job (one of the many features that requires them to pay me so much to work in NJ.) There are 2 gas stations on that circle. One of them is consistently 1-5 cents cheaper than the other, but the more expensive one always has cars. I do now have any understanding of why that would be.

  • stooopid consumer||

    More expensive must mean better.

  • Fatty Bolger||

    Looks cleaner? Better access? Superior coffee? Contract with a managed fleet? Could be a lot of things.

  • Some Guy||

    Looks cleaner?

    Nope.

    Better access?

    Not really.

    Superior coffee?

    The other one is a Wawa. Best coffee around.

    Contract with a managed fleet?

    That's a whole lot of fleet vehicles.

  • ||

    Very Old Information.
    When I ran a gas station (1973), we were always 1 cent/gal. below the other independent stations in town which priced us at 2 cents/gal below the big guys (Shell, Sinclair, etc.).
    My boss told me he sometimes rode the tank truck to the terminal to pick up gas for delivery.
    He said all the trucks from all the oil companies got the same gas and some of them put about 5 gallons of additive in the fuel to be delivered.
    Apparently this made the major companies product worth an extra 2 cents.
    We had our own marketing strategy.
    Sleepytown (pop. around 20K then and now) has a sizable state University (enrollment about 20K then and now).
    With every fill up we gave away a pack of free rolling papers.
    Of course very few college students had the $6 or $7 it took to fill up their 60's era beaters so we gave them the Zig Zags anyway.
    Must be why we finally went out of business.

  • George V||

    Yes. I say let's go with 7/10th.

  • EscapedWestOfTheBigMuddy||

    I have actual seen $D.CC 4/10 a couple of times.

  • Paul||

    We're talking about Gas, not hookers.

  • kilroy||

    Hookers with gas?

  • anarch||

    99 44/100% pure.

  • ||

    I was expecting a Willy Wonka link for some reason.

    "Insatiable" was the first porno I ever saw (when I swiped it from my dad's dresser), and to this day I think she was one of the hottest porn stars ever.

  • BakedPenguin||

    Flanders: "I don't know where I'm at, but the gas is $2.50 and 8/10 a gallon."

    Marge: "Eight-tenths? Donny's Discount Gas!"

  • cynical||

    Yes, replace it with 9 with a bar dealie over it.

  • ||

    How does one reconcile that which CERA sets forth with James Howard Kunstler's "The Long Emergency" scenario?

  • Gilbert Martin||

    When do we get to the part about the EVIL oil companies supressing techology that would have all our cars running on tapwater?

  • Paul||

    Here's a guy who claims he's been getting over 100mpg since the 80's. Apparently he's in the Guinness book of World Records.

    I'm skeptical. Because every article I read suggests that after the 80's, no one cared about high gas mileage anymore. But now... NOW, not two years ago when it was $4 a gallon, but NOW that gas is back under $3 a gallon, he's brought this car back out to prove to the world that it can be done. Because NOW we care about gas mileage.

    There has to be a catch. Because if he thinks no one cared about gas mileage in pretty much any year since 1984, he's confused, on crack, or both.

  • ||

    $10M is a much better incentive, and entails far less risk, then trying to build a business from scratch by capitalizing on a price spike.

  • Paul||

    But that's not really my point. I'm trying to reconcile his (admittedly somewhat verified) claims, with reality.

    Toyota et. al. had the finest automobile engineers in the world trying to squeeze 50mpg out of a vehicle using gas/hybrid technology, new, sophisticated on-board computing technolgy and a trunk full of nickel-metal hydride batteries, with a $35,000 price tag on the end product which they took a loss on just to make it palatable to consumers. If my memory serves me, they spent around $2 billion in research.

    This guy banged out 100+ mpg car in 1984 out of his garage using a phillips screwdriver, socket set and a protractor, a diesel engine and a not-particularly-unique body design, somewhat similar to the Aptera*, but with four standard wheels when computing technology consisted of "Pong".

    All this while while claiming his idea never took off because no one was interested in high gas mileage-- please ignore those Toyota engineers spending $2 billion in research trying to increase gas mileage by 15%. I'm trying to find out where the disconnect is.

  • Paul||

    *Aptera:

    A car company that was essentially stillborn after spending millions in research trying to get a viable electric car out the door and into consumers hands.

    I mean, this guy should have walked over to Aptera and said "I got something you might be interested in... I mean, it might save you a few hundred million in research... oh, and that body design, you don't need to go as far as you're going, just put hubcaps on it and you'll be fine"

  • Chad||

    Ummm, a base model Prius costs $22500, gets 50 mpg, and generates profits for Toyota. The hybrid premium is essentially gone nowadays...the gas savings (even assuming $3/gal average over the lifetime of the vehicle) puts the total cost of a Prius in the same range as comparibly equipped non-hybrids such as a Corolla.

  • Paul||

    I was uninformed about the current Prius prices. This doesn't change my argument one whit. If you change my paragraph:

    Toyota et. al. had the finest automobile engineers in the world trying to squeeze 50mpg out of a vehicle using gas/hybrid technology, new, sophisticated on-board computing technolgy and a trunk full of nickel-metal hydride batteries, with a $22,000 price tag on the end product which they initially took a loss on just to make it palatable to consumers. If my memory serves me, they spent around $2 billion in research.

    So how is this guy getting 112mpg out of a straight diesel engine designed in 1984 and a car body that looks like it was designed by the Swiss in the 60's?

    Had Toyota, Honda, GM (ok, bad example), Chrysler (ok, bad example), Ford, Datsun/Nissan etc. known this, think of the billions that could have been saved-- and the whole hybrid technology and dependence on foreign lithium could have been avoided altogether.

  • Knoss||

    I thought that Active Fuel Maangment which GM was working on in early 80's ahad a lot more potential. In tis decade most automakers were making a V-8 with such a system.

  • rho||

    Probably because the 100mpg-car-guy didn't have to contend with all the regulations that Toyota has to in order to actually sell a car.

    Anybody can make a lightweight car, stick a well-tuned diesel in it and have a high-mpg. No seatbelts, no A/C, no adjustable seats, etc. and you save a lot of weight. And nobody would buy it, nor survive if they crashed in it.

  • Paul||

    I've considered that. But given the general rule of thumb: 1mpg for every 100lbs of weight, I'm skeptical.

    If you put all the regulatory stuff on that car, it's doubtful that you'd add 2000lbs to the total weight. But for argument, let's say it did. He'd lose 20mpg. At over 80mpg, he's still blowing the doors off cars that have spent years in research just to squeak an extra 10mpg out of. There's a disconnect on this somewhere.

  • Paul||

    Let me put it this way, when car manufacturers have begun to drop the oil weight in cars down to 5w-30, 5w-20, 0w-20 etc., just to squeeze an extra mpg rating from the EPA, it can't be this easy. It just can't.

  • Dello||

    Strangely, the 100 MPG car can very much be a reality. Toyota is jumping through a bunch of hoops because they can't think outside the box.

    The technology already exists to get 100 MPG, but it takes a non-engineer to see it, because they've been taught that it can't be done.

    To wit: Run a GAS car at 25:1 compression ratio, and you'll be putting out more power than you'll know what to do with. Combine that with a 35:1 air/fuel ratio, and squirt so little fuel into the cylinders that you almost can't see it with the naked eye (after all, you're making so much power, you don't need much gas to get down the road).

    Use direct injection to get better fuel atomization, and pre-heat it to boot.

    That's a few of the basic principals of an engine I helped design, 95% of the components of which are already in production today (the final 5% being the computer program to control everything).

    But just like nobody will follow up on my post here (including you guys), getting anyone interested in ANYTHING is actually pretty hard work.

  • Paul||

    Strangely, the 100 MPG car can very much be a reality. Toyota is jumping through a bunch of hoops because they can't think outside the box.

    I disagree, at the time, throwing an electric motor on a car and the computing technology to invoke said motor when the gas motor wasn't needed was very much outside the box.

    The internet is full of stuff that claims that "with $25 worth of technology, you can magically increase your gas mileage by 9000%", I'm extremely skeptical. It's Occams razor. If it were really that easy to get 100mpg out of a car with a few tweaks to the compression ratio, even the American car companies would be all over that technology.

    At $8 a gallon for gas in Europe, they've been well hip to any technology which increases mileage, and they haven't produced a 100mpg car. This America-centric view that "no one was interested in high gas mileage" is unadulterated BS. The Europeans have been interested in high mileage cars for years, even if admittedly, Americans weren't as interested.

  • Dello||

    "I disagree, at the time, throwing an electric motor on a car and the computing technology to invoke said motor when the gas motor wasn't needed was very much outside the box."

    Except that the first gas-electric hybrid was developed in 1900 by Porsche. They didn't exactly reinvent the wheel by making it computer controlled.

    Additionally (from the Wiki): "The 1915 Dual Power, made by the Woods Motor Vehicle electric car maker, had a four-cylinder ICE and an electric motor. Below 15 mph (24 km/h) the electric motor alone drove the vehicle, drawing power from a battery pack, and above this speed the "main" engine cut in to take the car up to its 35 mph (56 km/h) top speed. About 600 were made up to 1918.[29]"

    Looks like they were doing the Prius before Toyota was making cars.

    "If it were really that easy to get 100mpg out of a car with a few tweaks to the compression ratio, even the American car companies would be all over that technology."

    LOL! The problem is that running a GAS engine at 25:1 compression will make it explode, unless the other aspects of the engine are also addressed. So no, it really not that easy to do, but it can be done. And with current technology.

    "At $8 a gallon for gas in Europe, they've been well hip to any technology which increases mileage, and they haven't produced a 100mpg car."

    Again, they're engineers, so for the most part, they can't think past what they were taught.

    The reason so many inventions come from some guy's garage is that NOT being an engineer means that we don't know that it CAN'T BE DONE, so we just go find a way to do it.

  • Paul||

    Electric cars were in use before the turn of the century, I'm aware of that. But we abandoned them for a reason. Aptera just discovered that reason.

    Here's an article from Popular Mechanics on how to build a 100mpg car. The devil is in the details.

    They're still talking about hybrids, not a diesel engine built in 1984 with a body used in the original Avengers TV series. In addition, they're also talking space-aged materials-- stuff these kids weren't using in his mother's garage in '84.

    The Europeans did recently develop an 80mpg car, but it doesn't reach U.S. emissions standards. But don't let my position on this confuse you. I don't care. U.S. Emissions standards or not, it's very hard to build a car that does 80mpg that doesn't boast the size of a Yugo. Emissions standards be damned, first build a car that gets 100mpg, then tell me you're going to lose 60mpg adding on the emissions stuff. You might lose 20, you might even lose 30, but you won't lose 60. Even at a 20 or 30% loss (actually less than that because the Avion claims 115mpg in some tests), you'd still have a car that would blow the doors off the best built, highest mileage cars around today. Period.

    You don't trust "engineers", I get it. Neither did the guy on the car forums who said he could double his gas mileage(hint, he's not an engineer either) with an HHO setup, even though an engineer told him that thermodynamics precluded it.

  • Paul||

    Due to Reason's link restrictions, here's how to double your mileage with HHO: (warning, includes snake oil): http://www.ehow.com/how_474694.....ation.html

  • Dello||

    "U.S. Emissions standards or not, it's very hard to build a car that does 80mpg that doesn't boast the size of a Yugo."

    That's because the car manufacturers don't actually know how to make more fuel efficient engines, so all they can do is use lighter weight material on ever smaller cars. Our design is strictly engine, so it could be put in a Yugo or a dump truck (or an ocean liner, for that matter), and still get 3 times the mileage that the current engines get.

    "You don't trust "engineers", I get it."

    I trust engineers just fine, I just don't have much faith in their ability to think beyond what they are taught.

  • Jimmy Olson||

    Dello said: "That's because the car manufacturers don't actually know how to make more fuel efficient engines, so all they can do is use lighter weight material on ever smaller cars."

    That's completely false. Car have been getting steadily heavier for 25+ years. They've also been getting faster. They do know how to build more efficient engines, but use the extra efficiency to make the cars bigger and faster instead of making them burn less fuel. Americans won't buy small, slow econoboxes like they did in the 80s, but if they would, manufacturers could make them with higher MPG than they did back then.

  • Dello||

    From the Popular Mechanics article:

    "Fuel economy is all about efficiency. The lighter the load, the smaller and more efficient a car's powertrain can be."

    And this is exactly what I'm talking about. The automotive engineers are looking for "efficiency" through lighter weight, while we find efficiency by ACTUALLY GETTING MORE WORK OUT OF THE FUEL.

    Since the engineers "know" that it can't be done, they stop trying to figure out how, and instead take the easy way out by using small cars and carbon fiber.

    As for emissions, I don't honestly know that our engine would pass the US tests, but since it can run on any mix of gas, diesel, bio, ethanol, jet fuel, alcohol, propane, natural gas, or any other liquid or gaseous fuel you put in it, I'm pretty sure we could work something out.

  • Paul||

    through lighter weight, while we find efficiency by ACTUALLY GETTING MORE WORK OUT OF THE FUEL.

    There's a functional limit to how much energy is stored in a gallon of gas. I don't know what the numbers are, but when you calculate how much energy you can obtain by the expansion that occurs when a gallon of gas is combusted, there's some upward limit.

    I'm not hip to all the math on this, but it takes a certain energy to move a given amount of weight. All we're trying to do is move that amount of weight (your car) with the least amount of loss (read efficiency) possible.

    Here's a good page which describes that process with the requisite math: http://www.uwgb.edu/dutchs/pseudosc/200mpgcar.htm

  • Dude||

    "Since the engineers "know" that it can't be done, they stop trying to figure out how,"

    For what it's worth, a similar situation exists in computer science. IBM had a spectacular failure in the early 70s with the OS/360 project and the project lead, Fred Brooks, instead of admitting that he screwed up and took the whole industry into the weeds, wrote a book about how *anyone* would fail at doing the same thing.

    Since then, we've got truly shitty software and there's no funding for alternative construction methods. We're stuck with the (failed) approach he took. There's even a prestigious computer science award named after the guy.

    What a fuck up. It really pisses me off how much damage he caused.

  • z reyes||

    its not that hard to get high gas mileage ..............if one is willing to sacrifice. Back in the 90's my boss had a chevy s-10 that got close to 65mpg,with a lot of mods.
    replaced the v6 with a 3 cyl forklift motor,replaced the 4 speed auto with a toyota 5 speed,then backed with a over/underdrive auxilary transmission,took out all unnecessary/unneeded weight,like seats(replaces with plastic go cart seat)replace entire front end with fibergass panels/parts,took out inside metal of bed,removed door glass and back window,removed complete dash including gauges and wiring,and also(the biggest improvement)replace rear axle with lighter unit with custom made gearing,from 3:42 factory ratio to a 2:11ratio.
    the truck got real high fuel mileage, but took almost 5 minutes to reach hiway speeds and the truck would piss away any fuel mileage advantage while struggling over a small hiway overpass. boss was real proud of the numbers,until i told him he could achieve even better numbers by simply reducing more weight,then punch holes in floorboards and use foot power.
    my boss wasnt enthused!!

  • Paul||

    And this is my point. I don't deny that one might get a 100mpg car "easily" when you build a lightweight aluminum frame with a stadium cushion as a seat and a fiberglass shell shaped like a teardrop and drive it on 100% level ground in a straight line with very skinny tires.

    But the guy in this article has done it with what appears to be... a car. A real car. With seats, regular tires.. the works. This car recently has been in the news and is shooting for the X-Prize... let's see how it turns out.

  • ||

    Probably several catches. 1) Aluminum and composites: both more expensive than steel, perhaps harder to mass-manufacture. 2) Crash tests: I'l bet a 1500 pound car made of aluminum and composites crumbles like an egg. 3) Acceleration: can it get to highway speeds in a reasonable amount of time? 4) Features: air conditioning, heating, stereo, air bags, luggage space, spare tire, etc..

    By the time you turn it into something that can be manufactured for a reasonable amount of money, and satisfies the modern car buyer and the NHTSA and so on, either the MPG drops or the car costs $60,000. Or both.

  • trueofvoice||

    The study is not bullish about an increase from 85 mbpd to 115. It specifically states this would be a slower rate of growth in supply than we have seen in the past.

    It does not state that the "undulating plateau" may last until 2070. The authors make clear they have no idea how long the plateau will hold.

    The study speculates that peak oil demand may soon be reached in developed countries, but completely fails to address the rapid growth in demand by developing countries. China's demand alone is growing at 7.5% PER YEAR, and this trend is likely to accelerate as its middle class continues to expand.

    You've done the same today as yesterday. Deceived by omission, because you know most visitors won't read the study for themselves. You don't thoroughly read the material, you don't check your facts, and you don't vet your sources before quoting them.

    You'd fit right in at the New York Times or Washington Post.

  • Paul||

    Except China leads the world in green technology and policies. NPR even said so.* So their fuel usage will drop in favor of electric skateboards, or something.

    *see if you can find the irony in the story.

  • ||

    I repeat, how can one reconcile what CERA says with the Kunstlerian viewpoint?

  • ||

    libertymike: You don't. Kunstler is simply wrong. Or so I think.

  • ||

    I agree; but as opinionated as I am, after I read The Long Emergency in 2005, I was depressed for days. Same thing happened to me after reading One Day in the Life of Ivan Denisovich.

  • Chad||

    Ron, oil production has been essentially flat for five years now. Why are you betting on the guys who say that it's magically going to grow over 40% the next twenty years?

    The only way we could get even remotely close to those kinds of numbers is through massive amounts of coal-to-liquids, shale oil, etc...all of which are very expensive and all of which are environmental disasters which would never pass a half-way honest cost-benefit analysis.

  • trueofvoice||

    Don't even get me started on how useless NPR is.

  • A is Awesome||

    Whoa now, Car Talk is awesome.

  • Mr. FIFY||

    Car Talk USED to be fun, until Tom and Ray turned into pussies.

  • ||

    You've done the same today as yesterday. Deceived by omission, because you know most visitors won't read the study for themselves.

    Sorry, I can't follow your post. Are you saying that the study really claims peak oil any day now? In just a couple of years? The end is nigh, but Bailey is trying to hide it from us?

  • ||

    trueofvoice: I am soooo duplicitous that I link to the actual report as a way of misleading people. Very clever of me.

    But just in case other readers are duped by my nefarious misdirection, let me quote the report:

    In our view this inflection point will inaugurate a new era—the beginning of an undulating plateau of supply. That, in turn, will last for another two decades or so, before a long, slow decline sets in. Would that be in 2050 or 2060 or even 2070?

    What is it about "perhaps" that you don't get?

  • Chad||

    CERA is generally correct about the undulation part, which basically means a cycle of economic growth --> much higher oil prices --> economic bust --> somewhat lower oil prices --> economic growth. What they get wrong is that we are already there.

    I don't know about you, but minimizing such undulations sounds like a pretty good plan to me.

  • ||

    trueofvoice: See my reply on 2070 below. On peak demand, CERA explicitly suggests:
    Moreover, if the "peak demand" now evident in the OECD countries is a precursor of later developments in the emerging markets, world demand itself could eventually move on to a different course.
    In other words, developing countries including China could follow the oil demand trajectory of developed countries before "peak supply" becomes an issue.

    Again, very very sneaky of me.

  • ||

    We will now all collectively hold our breath while "trueofvoice" types his apology.

  • iamtheeviltwin||

    Reading comprehension does not seem to come easy to you.

    From Bailey's article:
    ...the international insurance syndicate Lloyd’s of London issued a rather bearish report suggesting that “a spike in excess of $200 per barrel is not infeasible” around 2013. “An oil supply crunch in the medium term is likely to be due to a combination of insufficient investment in upstream oil and efficiency over the last two decades and rebounding demand following the global recession,”

    followed by:

    On the other hand, Cambridge Energy Research Associates (CERA), one of the world’s leading oil supply consultancies, rejects the notion of imminent “peak oil” and projects a more bullish production increase from about 85 million barrels per day now to over 115 million barrels per day by 2030.

    The CERA report is more bullish than the Lloyd's report. Which if you bothered to actually comprehend the article you would understand.

    BTW, the authors of the CERA report stated that the plateau could very well last until 2070, but that they were uncertain, from the CERA report:

    In our view this inflection point will inaugurate a new era—the beginning of an undulating plateau of supply. That, in turn, will last for another two decades or so, before a long, slow decline sets in. Would that be in 2050 or 2060 or even 2070?

    Which is what Bailey stated in his article if you could comprehend English. From the Bailey's article:

    Afterwards, the CERA analysts foresee global oil production reaching an “undulating plateau” lasting for several decades, perhaps until 2070, before it begins a permanent decline

    You know it difficult to "deceive by omission" when one includes cited sources, unless the reader's ability to comprehend the language is sub-par,

  • iamtheeviltwin||

    Bah, Bailey beat me to it...that's what I get for mutlti-tasking...

  • Chad||

    ToV: You are ignoring the second derivative of oil production, which is strongly negative. Growth has been slowing for some time, and is essentially zero. It is indeed bullish to believe it is going to jump back to the kind of growth rates seen when one could stick a fork into the ground in Texas and see oil shoot out.

  • ||

    Perhaps the author missed this article

    http://www.usatoday.com/money/.....-tax_N.htm

    The reason gas prices are lower is because they are being taxed less. This article shows a complete lack of subject knowledge.

    Gas prices are subject to state control, it is that simple. If the state decides in the future to raise prices again to actually promote less driving and fuel conservation (as well as CO2 emission reduction), the prices will follow.

  • ||

    Holy cow. Do you even read what you cite?

    The reason gas prices are lower is because they are being taxed less.

    No. This article says nothing about gas being taxed less. In fact it says that neither federal nor state and local gas taxes have changed in the recent past.

    The article instead bemoans the reduction in total taxes collected because gas mileage has increased so much.

    The effects of tax on the price of gas are unchanged.

  • Paul||

    That article is uhm, questionable. Especially when you compare its premise to the actual data.

    For instance, gas taxes haven't gone "down" anywhere. Washington State, for example, hasn't removed or lowered a single tax. Note from the article:

    Although the federal gas tax — 18.4 cents per gallon — hasn't changed since 1993, tax collections are down because today's vehicles go farther on a gallon of gas, cutting tax collections while increasing wear and tear on highways. Inflation since 1993 has eroded the value of the tax to maintain roads.

    So the article has some seriously contorted logic:

    Well, no gas taxes haven't actually gone down, silly...pffff but the overall value of those revenues has diminished because of better gas mileage (someone better tell NPR, because they say otherwise), inflation and something I didn't see in the article which has been studied scientifically and stuff: This a'here bad economy has reduced the miles driven by Americans dramatically over the last three years, reducing gas tax revenue because people aren't buying gas in the first place.

    "Lower gas taxes". I mean, really.

  • ||

    Interesting that the article you linked doesn't say what you claim. You seem to have a "complete lack of subject knowledge" about the article to which you fucking linked! Taxes haven't been reduced, they simply haven't been increased in over a decade, and so are lower when adjusted for inflation. The article even specifically says that taxes haven't been increased since the '90s!

  • Old Mexican||

    So what determines the price of gasoline? Speculators? Evil conspiring oil companies? Well, actually no. It's demand and supply, of course.

    Of course - as long as the market is allowed to clear. If the government steps in a la Nixon, then the true price will make itself obivous in some other way, like LONG LINES and higher scarcity.

  • ||

    C'MON... I expect a little more than a middle school economics explanation. Why of course its "supply and demand"... and to avoid "speculation" as a cause for the increase in gas prices may technically be correct... that ignores the fact that the main factor in gas prices, which is oil prices, was severely affected by speculation during the recent peak.

  • ||

    It's demand and supply, of course.

    Not this time. The current 3 bucks and change for a gallon of gas has more to do with the falling value of the US dollar then anything else.

    Well i guess it is supply and demand. To many dollars chasing to little demand for them.

    Anyway nice try Bailey but sadly you fail.

  • Chad||

    Anyone know how I can short CERA?

    115 million bpd my @$$. I bet them 10:1 that we will never hit that level. I'll go even up at 95 million bpd.

  • Atabrat||

    Don't see Scott Pilgrim?

  • ||

    For this exercise, I am assuming gas companies broke even on the sale of gas when the market bottomed out. (0% profit/loss in Dec 2008)

    One question I do have is: If oil dropped from $147/bbl to around $30/bbl in about 5 months time but gas prices went from $4.05/gal to $1.65/gal, does that mean that the refining costs and taxes for a gallon of gas average $.83/gal? And, if so, the profit per gallon would have been around $2.10 per gallon at the peak of the market when gas was selling for $4.05 after accounting for the increase in cost of raw materials.

    It also doesn't jibe with the price of gas vs the price of oil preceding the spike in oil prices. Now, does this mean that production costs increased dramatically running up to the spike in July 2008? If so and their profits were more modest than my predictions, then they were selling gasoline at a significant loss in Dec 2008 and beyond.

    I am just curious how the gas companies are able to tell us they can pay 78% less for a barrel of oil but only drop the gas price by 60% on the way down, yet they increased their price of gas 250% on the way up when their cost of materials only went up 120%, and not fear some skepticism by the general public.

    Of course, if these companies operated in a free market, then the market would dictate raw material costs as well as labor costs, but when you operate hand in hand with several governments and because of that produce ethanol at a loss (while taking government subsidies on the other end to compensate), you can tell the American people you had a rough year and prices really are consistent...even though the empirical evidence says otherwise.

    Again, I agree with most of the article, but you cannot think we are so naive we cannot calculate for ourselves and realize that there was some chicanery going on either on the way up or the way down (or both).

  • ||

    sloopynica: The $30 price is a spot price. Given production and refining lead times, the monthly or quarterly averages are what should probably be used in figuring out gasoline prices at any specific time.

  • ||

    I'm just using the peak highs and lows of the time frame, and I know that's over simplifying it a bit. However, I'm sure we can all agree that prices increased more dramatically than their costs, yet they didn't fall with the same velocity. That was all I was saying.

  • ||

    Ron, I understand where you are coming from, but it would have been hard to use quarterly averages when there were wild fluctuations within the quarters. The high in Q3 would have been nearly 500% of what the low from Q4 was. I'm sure there was some lag in production times and those lags were probably used to justify the slower decrease in price on the down side, while being ignored while oil prices were rising and gas prices rose equally.

    I recall that GWB got a lot of shit (as did McCain) in the run up to the 2008 election...as well as into 2009, when the oil and gas companies announced their astronomical profits relative to 2007 and earlier numbers, all the while Americans were scratching their heads wondering why the prices never seemed to drop as quickly or as much as the increases that accompanied the oil cost increases.

    I know a lot of that was Democrat talking points used to incite the masses, but there was a grain of truth to it that cannot be simply brushed aside due to lagging production factors, etc.

  • ||

    I'll just wait for the next oil price spike then short all the oil company stocks before I unveil my Pocketfusor* wallet sized 10mw fusion reactor.

    Dr. Evil Aresen

    *Eeevilll chuckle*

    *TM

  • ||

    Tell me if this perceived phenomena is an illusion. When the cost of gas rises the price you pay at the pump goes up that much plus a penny or two more. When the cost goes down, the price you pay goes down a penny or two less than the cost decrease so that there is a continual overall tradjectory upward in the price of gasoline independent of costs.

  • ||

    See my post above where I calculated exactly what you are saying. With production costs being equal, these guys were either profiteering on the way up or the way down. Either way, they had a few quarters of absurd profits. NTTAWWT.

  • ||

    Stopped in Foristell MO today (Tue. Aug. 31 2010) eastbound on I 70.
    When I gassed up the unleaded regular was $2.329. Before I got out of the parking lot 10 minutes later the unleaded regular was $2.599. Up 11.59% if my math is correct.
    When I arrived home in Southern Illinois unld reg was $2.599, virtually unchanged from the price I paid Sunday Aug 29 before I travelled west to the Show Me state.
    I know that gas taxes are significantly higher in Illinois over Missouri (MO roads are significantly worse too) and maybe the dealers here haven't "got the call" yet about a price change.
    This is almost a week before the holiday.
    Can Swami Bailey please predict which way prices will go in the next few days?

  • ||

    I went to Hilton Head, SC recently, and actually paid $.65 less per gallon at an Exxon station at a marina for unleaded (87 oct) than I did at my local Valero upon arrival 3 days later back in California, and it was $.20 cheaper at regular stations in Beaufort, SC.
    I live nowhere near the coast here, but recently went to Pismo where gas was $.20 higher than at home.

    I find it hard to believe that gas in Beaufort, SC is cheaper to produce or has $.85 less in taxes taken when it is pumped. There's just no way that's possible. I wonder if Ron would be so good as to link for us what the tax rate per gallon of gas is for each state so we could all know how much the states are squeezing us as well as the feds (who get $.186/gal I believe).

    I guess I shouldn't complain too much. At least states' rights exists somewhere.

  • ||

    For smog reasons, California uses the most specific gasoline blends in the US. It is always more expensive at the pump, first because it costs more to make, but more so because it is costly to trade across state borders and therefore has a limited market.

  • ||

    I realize those things, but 35% more. With Long Beach and the capacity to store and refine right here? I'd bet 75% of the fuel refined in California stays in California, so the trading across state borders is irrelevant to the argument.

    According to gaspricewatch.com CA charges a baseline of $.02 more than SC but then imposes another 6% sales tax plus local and county taxes plus their UST tax is a bit more. Figuring with today's prices, it would have to cost $.48/gal more to produce gas in California.

    Perhaps you are right, but I just can't see it costing nearly 60% more to produce gas here. Perhaps the govt forced production of ethanol here has increased the production costs. I live in the central valley and none of the corn produced here goes to ethanol production that I know of.

    Either way, the disparity is striking and yet another reason why businesses are running from California in droves.

  • ||

    I'd bet 75% of the fuel refined in California stays in California, so the trading across state borders is irrelevant to the argument.

    And that is exactly why it is expensive: there is a small market for California gasoline compared to the 8 times greater market for non-California gasoline. Furthermore, if anything happens to supply outside of California, other states will bid up California gasoline. But if anything happens to supply inside of California, California is out of luck.

    I live in the central valley and none of the corn produced here goes to ethanol production that I know of.

    No, it doesn't. The ethanol is shipped halfway across the country to get to California -- another expense.

  • BakedPenguin||

    Kind of off-topic, but if gas hydrates could be economically mined, we'd have enough energy to power the US for several hundred years at our current rate of consumption.

    This could free up oil and other aromatic hydrocarbons that are currently being used for power generation.

  • ||

    Hey, how about nuclear energy?

  • Kant feel Pietzsche||

    Don't forget unicorn farts...

  • BakedPenguin||

    "The worldwide amounts of carbon bound in gas hydrates is conservatively estimated to total twice the amount of carbon to be found in all known fossil fuels on Earth."

    The USGS estimates 10,000 gigatons of gas hydrates around the planet. But hey, keep talking shit.

  • ||

    The idea that oil prices are just based on supply and demand of consumers right now is false.

    Look at a chart of oil, and overlay it with the Dow. You will see a VERY strong correclation. Oil has been trading as an asset class for quite a while now. This is especially true in the shorter term.

    Risk on, oil goes up, risk off, oil goes down.

    Also on the supply/demand side, it's VERY much focused on short term supply/demand not on long term.

    So most likely the market is not getting the types of signals it needs.

  • ||

    First the author states:


    So what determines the price of gasoline? Speculators? Evil conspiring oil companies? Well, actually no. It's demand and supply, of course.

    But then he follows with this:


    So what will happen to future gasoline prices? Let’s review a little a bit of history. World oil prices peaked at about $147 per barrel in July 2008—the highest price ever for crude....oil prices collapsed to just above $30 per barrel by December 2008.

    I'm sorry but I must have missed the "demand" crash that would have been necessary to facilitate an 80% fall in crude oil prices over the span of 4 months.

    Supply and demand most certainly effect the price but they're not the only drivers, as this article incorrectly postulates. The 2008 price spike was the result of pure speculative trading...no different than any other pricing bubble.

  • ||

    I wouldn't say "pure" speculation, but yes trading was a part of it.

    I think also due to gas's inelastic demand, small changes in demand or supply can have larger changes in price.

  • ||


    I wouldn't say "pure" speculation, but yes trading was a part of it.

    Crude oil prices are dictated by 3 things: demand, supply, and speculation. An 80% price drop in 16 weeks is dramatic and would in turn require a dramatic event in one of those three drivers.

    Was there a dramatic increase or decrease in demand during those 16 weeks? Not at all.

    Was there a dramatic increase or decrease in supply during those 16 weeks? Nope.

    The end.


    I think also due to gas's inelastic demand, small changes in demand or supply can have larger changes in price.

    Wrong. Small changes in demand or supply lead to small, incremental changes in price. It happens on a daily basis, a fact that is can easily be observed by watching the prices at your local gas pump.

  • ||

    I think you are forgetting the idea of estimated (or foward looking demand). Also that markets and prices tend to overshoot.

    Anyway, see my post right above yours. I agree that trading is a factor. But it's not all of it. Supply was tight in the run up, then when the recession started to kick in, people realized that future demand was going to fall, and thus you got the massive correction.

  • Mark||

    I wouldn't call the price of gas a function of a free market. The US government spends a large chunk of its $700+ billion dollar military budget on keeping the countries that oil comes from in line and/or protected. I've read estimates saying $180 billion of the DoD budget is spent every year on that military effort. Of course that is not included in the price of gas at the pump. Say that estimate is way off and it is only a $100 billion yearly subsidy. The "free market" for gas is actually a massively subsidized market and the price we pay at the pump in no way reflects the actual cost of getting the gas to that pump. The fluctuations in pump price may reflect the changes in crude supply/demand but the fact that gas costs less that $10+ a gallon is a gift from the federal government.

  • ||

    You must be kidding.

    The instabilities and uncertainties caused by the US's tromping around in the Middle East has greatly increased both oil prices and volatility. In no way is it a subsidy. Quite the opposite.

    In fact, if one were being conspiracy-minded, one would surmise that domestic oil interests were behind US government involvement in foreign oil suppliers in order to raise the price of their own domestic stocks.

  • ouyang||

    Perhaps this is one of the most interesting blogs that I have ever seen. Interesting article, Funny comment. Keep it up!

  • surpa shoes||

    Very good post. Made me realize I was totally wrong about this issue. I figure that one learns something new everyday. Mrs Right learned her lesson! Nice, informative website by the way.

  • ||

    oil prices, and thus gasoline prices, will fluctuate based on demand and supply.

    You don't say.

    I want five minutes of my life back.

  • ||

    Not a huge deal but just thought I would mention that a predicted spike in oil prices is not "bearish"; it's bullish. Just because what is being predicted is perceived as a bad thing does not mean it is bearish. The word refers to prices going down. Whether that is bad or good depends on whether you are buying or selling.

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