Gas Goes Up With Oil But Down Slower

Many people have observed that the pump price of gasoline rises quickly when the price of crude oil goes up, but drops more slowly when the oil price drops. This fast up slow down price behaviour is known as an asymmetric price relationship. Does it really happen this way? Or is it a mistaken impression, perhaps born out of bitterness at having to pay a lot at the pump? Several studies of the relationship between oil and gas prices have been done. The Federal Reserve Bank of Dallas has done a detailed and comprehensive study specifically to look for gasoline-crude price asymmetry.

Although the study document linked to above is quite technical, it is easy to read the conclusion. And what is the result? No surprise for most of us: the study clearly finds that there is an asymmetrical relationship. It is true that when the oil price goes up gasoline goes up quickly but when the oil price drops, gasoline drops more slowly. The mentioned study does not attempt to determine why this happens. It only confirms statistically that it does happen. Of course, most people can quickly think of a reasonable explanation. The gasoline merchants want to make a few extra bucks, so they hold the consumer price of their product up while enjoying cheaper wholesale prices. The study provides no statistical backing for this explanation, but one quick look at the greedy behavior of a typical mega corporation shows that this particular shoe sure does fit.

Fuel Efficiency and the Economy

The possible effects of increased fuel efficiency on the economy are wide ranging and complex. Fuel Efficiency and the Economy is a well written and understandable overview. It contains an input-output analysis showing how proposed changes to automotive fuel-efficiency standards would propagate through the national economy. Of particular interest is Figure 3, which shows a range of current and near future technologies giving for each one a band of estimated fuel economy improvements and possible increases in retail cost. Also of interest is Figure 2, which demonstrates how since the 80's Detroit has been putting increases in engine efficiency into achieving shorter and shorter 0 to 60 times for heavier and heavier vehicles instead of using fewer gallons per hundred miles.

Paying for Piracy

One of the last things people expect to have an effect on their lives today is piracy. Although once stamped out, it looks like piracy is now on the rise. In fact, oil tankers are now being targeted by pirates! As piracy increases the costs of seaborne transport will rise. Even unsuccessful piracy will make shipping more costly due to elevated insurance rates. No shipping company will be able to avoid paying piracy insurance. Given that oil tankers are among the victims, crude oil delivered by sea will carry a piracy surcharge. And that will ultimately mean paying a little more at the gas pump. Who would ever have guessed that high seas pirates would be yet another reason to learn to save on gas!

Oilwatch Monthly

The Oil Watch Monthly is a publication chock full of data about the state of the world's oil supply and demand. Included above is one of many charts and graphs. This one shows the recent slump in global crude oil production. Anyone who has any interest in the future gas situation would be very interested in reading over the Oil Watch Monthly!

Road Mileage versus GDP

Maintaining roads is a costly affair. Without a road network in good shape, the value of owning a car is considerably less. Paved roads give the best driving experience, allowing for smooth travel at high speeds. Paved roads also give better fuel economy, as traveling over rough dirt or gravel increases the friction and makes the engine work harder. Recall that asphalt paved roads get more expensive to maintain as the price of crude oil rises, because crude oil is the main raw material from which asphalt is made.

We can estimate how well a country is positioned to maintain its road network by comparing the size of the network to the country's GDP. The CIA World Factbook has quite a few statistics measured per country. Amongst them are the total length of the road network, paved and unpaved, in kilometers per country and the country's GDP. The table below shows kilometers of road per million dollars of GDP based on this data. Countries with more road kilometers per million dollars of GDP will be harder pressed to keep their roads in good shape.

The United States weighs in with about half a kilometer of road per million dollars of GDP. France and Russia have about the same values. Germany, China and Japan have less roads relative to their economies, with only about a quarter of a kilometer to maintain per million dollars. India and Brazil are on the other end, with more roads relative to their economies; they have to support closer to a kilometer of road per million dollars of GDP.

Relatively speaking, it would seem that the US has about an average investment in road networks relative to the economy. Not bad, but in a future world where road maintenance gets more and more expensive following the lead of Germany, China and Japan could be smarter. The US could find that it has put too many GDP eggs into the transport basket.

Country	Road KM/Million $ GDP
Hong Kong	0.00663846
Singapore	0.0138588
United Arab Emirates	0.019777
Macau	0.0222712
Gibraltar	0.0272045
Kuwait	0.0384548
Maldives	0.0510737
Monaco	0.0512138
Taiwan	0.0564131
Jersey	0.0701961
Andorra	0.0737705
Korea South	0.0770022
Qatar	0.0850901
Israel	0.0878564
Liechtenstein	0.0913462
Bermuda	0.0993333
Equatorial Guinea	0.125217
Bahrain	0.130086
Mauritius	0.131432
Luxembourg	0.13243
Sudan	0.134661
Lebanon	0.157835
San Marino	0.175692
United Kingdom	0.17816
Isle of Man	0.183891
Brunei	0.186415
Netherlands	0.201143
Iran	0.204963
Guatemala	0.205018
Egypt	0.207666
Germany	0.220335
Switzerland	0.224137
Malta	0.224202
Mexico	0.227789
British Virgin Islands	0.234357
Tunisia	0.234594
China	0.24156
El Salvador	0.248937
Seychelles	0.25151
Dominican Republic	0.252014
Jordan	0.252588
Malaysia	0.256285
Italy	0.26694
Venezuela	0.269871
Japan	0.275806
Trinidad and Tobago	0.286009
Bahamas The	0.290526
Barbados	0.298118
Panama	0.30776
Peru	0.317987
Austria	0.323859
Thailand	0.328145
Chile	0.328458
Norway	0.336395
Greece	0.341864
Croatia	0.348607
Portugal	0.349347
Denmark	0.354542
Haiti	0.360798
Slovakia	0.365284
Puerto Rico	0.372861
Saudi Arabia	0.383063
American Samoa	0.384147
Kosovo	0.3848
Belgium	0.3902
Nauru	0.4
Argentina	0.40225
Honduras	0.402367
Finland	0.402789
Ecuador	0.404352
Cayman Islands	0.404848
Armenia	0.409357
Russia	0.410832
Colombia	0.41479
Morocco	0.417875
Indonesia	0.42654
Bulgaria	0.42808
West Bank	0.430711
Gabon	0.433365
France	0.446085
United States	0.44777
Angola	0.455931
Serbia	0.462267
Faroe Islands	0.463
Algeria	0.46382
Turkey	0.472343
Czech Republic	0.485317
Spain	0.485894
Burma	0.488511
Iraq	0.497617
Ukraine	0.50036
Saint Kitts and Nevis	0.504279
Ireland	0.511122
Ethiopia	0.51928
Kazakhstan	0.519654
Tuvalu	0.535475
French Polynesia	0.548961
Nepal	0.550558
Turks and Caicos Islands	0.560185
Cuba	0.561421
Nigeria	0.574658
Northern Mariana Islands	0.595556
Pakistan	0.601106
Swaziland	0.61689
Senegal	0.623324
Poland	0.632171
Oman	0.632571
Philippines	0.634538
Korea North	0.63885
Cyprus	0.642794
Slovenia	0.650681
Saint Lucia	0.682074
Macedonia	0.700053
Antigua and Barbuda	0.710799
Costa Rica	0.723382
Romania	0.730945
Bosnia and Herzegovina	0.733826
South Africa	0.735675
Azerbaijan	0.760265
Saint Vincent and the Grenadines	0.773321
Virgin Islands	0.797083
Canada	0.799923
New Zealand	0.802539
Hungary	0.811225
Albania	0.823422
Cape Verde	0.828221
Belarus	0.82937
Brazil	0.876811
Solomon Islands	0.87969
Jamaica	0.896506
Vietnam	0.916958
Georgia	0.942904
Grenada	0.947059
Botswana	0.951605
Fiji	0.959019
Syria	0.983253
India	1.00377
Micronesia Federated States of	1.00798
Australia	1.01254
Eritrea	1.01416
Iceland	1.01461
Suriname	1.01846
Paraguay	1.019
Kenya	1.03121
Sri Lanka	1.05642
Bangladesh	1.05665
Dominica	1.07394
Montenegro	1.07845
Vanuatu	1.07994
Congo Republic of the	1.12339
Nicaragua	1.13108
Libya	1.14026
Kiribati	1.15358
Sao Tome and Principe	1.15482
Cameroon	1.17123
Moldova	1.17278
Belize	1.18293
Comoros	1.18646
Uzbekistan	1.20401
Sweden	1.2324
Tonga	1.24065
Benin	1.24417
Mali	1.26841
Lithuania	1.27371
Yemen	1.28677
Malawi	1.29297
Cambodia	1.35998
Rwanda	1.43982
Bolivia	1.44027
Tanzania	1.45074
Togo	1.46589
Papua New Guinea	1.48823
Kyrgyzstan	1.58935
Mozambique	1.59079
Anguilla	1.60698
Djibouti	1.62084
Gambia The	1.64339
Cook Islands	1.74672
Mauritania	1.75012
Uganda	1.76512
New Caledonia	1.78024
Latvia	1.78883
Uruguay	1.79644
Ghana	1.80246
Niger	1.80272
Turkmenistan	1.87315
Afghanistan	1.88844
Estonia	2.03411
Tajikistan	2.10516
Chad	2.11125
Laos	2.12784
Lesotho	2.14814
Bhutan	2.27852
Samoa	2.28893
Cote d'Ivoire	2.34467
Timor-Leste	2.39113
Saint Pierre and Miquelon	2.42236
Sierra Leone	2.57521
Guyana	2.68079
Namibia	3.1805
Madagascar	3.25387
Guinea-Bissau	3.85388
Burundi	3.96333
Somalia	4.00072
Guinea	4.17589
Falkland Islands (Islas Malvinas)	4.18649
Burkina Faso	5.15006
Mongolia	5.18465
Zambia	5.21323
Liberia	6.92358
Congo Democratic Republic of the	7.39388
Central African Republic	7.63411
Saint Helena	11
Niue	11.988
Marshall Islands	15.191
Zimbabwe	50.5283

Global Oil Consumption

This video represents the oil consumption of each country with a three dimensional stack or pile above its land surface. This does not show oil consumption per area or per capita, just overall oil consumption. The height is the only thing that has meaning ... do not look at the volume of the colored areas. The thing that immediately stands out is just how high the red tower is over the US territory. A good sign we should be thinking of how to save on gas.

Introduction of the Tata Nano

The Nano is a small, very cheap car manufactured in India by the Tata corporation. The Nano sells for a price equivalent to about $2,500. That is correct ... a car for under three thousand US dollars. The Nano has good fuel economy. Supposedly it uses 2.00 GPHM (Gallons Per Hundred Miles). It is a small car, only 10 feet long. But it is going to have a big impact on the future of gasoline prices.

The important thing about the Nano is that it represents a new era of cheap cars. Hundreds of millions or even billions more people in the developing world will in the near future be able to afford cars. That means they will need to start buying gasoline and the oil to make it from. Now the oil producers of the world are in fact entering into a stage where they cannot increase production and the world's total oil production per year may even soon start to decline. Combine a constant or declining oil production rate with a billion more car owners and you can see that only one thing can possibly happen - the price of oil must go up.

The video below shows the official introduction announcement of the Tata Nano. I believe it is also the farewell speech to an era of cheap gasoline. The last century or so in the United States has been one of low gasoline prices. Because it has lasted a handful of generations, most people think gasoline will always be cheap. However, that is not so ... eras do come to an end. Introduction of the Tata signals the beginning of the end of the era of "happy motoring" and the beginning of the beginning of a new era that will belong to the hypermilers.

Food Miles

In the modern world, some things can be done by communication without ever leaving your house. For example, to read a book you can download it without the need to go to a bookstore and pick it up. Family members can communicate over the telephone without having to travel to physically meet up in the same location. However other things still require and always will require physical transport. A perfect example of this is food. To eat something, it has to be on your plate in front of you. The distance that a piece of food travels from farm to kitchen plate is known as its "food miles". The typical food has gone between 1,500 to 2,500 miles before you get to eat it.

Oil Producers Consume Too

Most countries of the world depend on oil imports to meet their needs. For imports to be available, there must of course be a few exporting countries to supply that demand. And of course those exporting countries have populations that want to use oil in their own cars as well. There is the rub. The handful of oil exporters are experiencing increasing internal consumption as well as stagnant or declining oil production. That means the amount they can export must drop.

Consider for example the case of Saudi Arabia, the world's foremost oil exporter. The following statistics from 2005 show their growth:

Growth in GDP

6.3%

Growth in Oil Consumption

11%

Growth in Population

2.18%

Median Population Age

21.4

Growth in Auto Sales

10%

Trade Surplus

$120 Billion

Clearly Saudi Arabia is a young country and they are flush with cash from selling all their oil. And they want to buy cars and use some of that oil for themselves. As would anybody. The result is clear. A rich country that is increasing auto sales by 10% and internal oil consumption by 11% a year as its young kids seek the modern lifestyle will not be able to keep up its exports. Examples like this make it clear that we can expect permanently higher oil and gasoline prices in the near future. So let's start learning how to save on gas now while the pain level is low!

Keeping an Eye on Traffic

The US Department of Transportation's Federal Highway Administration maintains a traffic monitoring program. Based on a network of some 4000 sensors on roads, streets and highways across the nation they can esimate the total number of vehicle miles driven in a given hour, day or month. Vehicle miles is a way of measuring a combination of how many vehicles were moving and how far they moved. One vehicle mile could mean a single car drove a mile or that 4 cars each covered a quarter mile. The graph to the side shows the traffic volume for the entire US averaged over a 12 month window. This is interesting, because the amount of fuel used by the nation principally depends on two things. One is how many vehicle miles we are driving and the second is how much gas it takes on average to move a vehicle a mile. This graph shows that vehicle miles traveled goes in one direction - up. Until the summer of 2008 that is. You can see how the $4.00 gasoline we had at that time caused an unprecedented crash in the amount of driving.

Four Reasons to Save on Gas

Why go to the trouble of learning hypermiling culture and buying fuel efficient vehicles? Well, here are four reasons why you might do just that.

Number one is the money you can save. Saving on gas means you will be shoveling out less cash each time you fill up. Remember when the price of gas was at $4.00 per gallon? Well, that can come back. Just because right now today the price is under $3.00 per gallon does not mean it will stay there. And if the price of gas soars having a fuel efficient vehicle can put a lot of money back in your wallet.

Number two is you can reduce the dependence of the nation on imported oil. The US now spends something north of $400 billion dollars a year on oil imports. That makes the nation very vulnerable to oil market moves. An increase in fleet fuel efficiency nationwide of only 10% would keep $40 billion dollars in the US economy. That is a lot of money.

Number three is peak oil. Petroleum is a non renewable resource. One day soon it will no longer be possible to increase the extraction rate. However, the demand for oil will almost certainly keep growing as the global population rises and developed nations like China and India increase their standard of living. That means we will enter into an era of permanently high oil prices. The less gas we use now, the more prepared we will be.

Number four is climate change. Using less gas will dump less carbon dioxide into the atmosphere. And dumping less CO₂ certainly cannot hurt the climate.

So start introducing yourself to hypermiling culture. You can help yourself, the nation and the world.

World Without Oil

The World Without Oil is a website telling a story about what an oil crisis in the United States might be like. The story is told from the point of view that it is real, with blog posts and videos supposedly describing the daily situation. Sort of like the modern marketing campaigns for the television series Lost or the vampire series True Blood. The story covers a 32 week period over which the price of gasoline rises to $8 per gallon. There has been a lot of work put into this story. One problem is the format. Being spread out over simulated blog posts and news stories etc it feels somewhat incoherent. But if you want to instill hypermiling culture in the USA I guess writing stories like this one can only help. If you like disaster stories and are interested in saving on gas, you might be interested in World Without Oil.

National Fuel Gauge Reading Full

The Energy Information Administration keeps track of the total amount of gasoline in storage in the United States. This information is of interest because historically when the amount is low, the price of gasoline rises. This can happen regardless of the price of oil, the bottom of the pyramid in the gasoline production chain. Short term gas prices are set by the relation between demand for gasoline and the supply available. The EIA publishes a report called the Weekly Petroleum Status Report where you can always find the latest updated information.

In the graph, taken from the current Weekly Petroleum Status Report you can see how in September 2008 the amount of gasoline was well below the gray average band. We also had record fuel prices in that time. Right now the national gasoline supply is above average. Good news for drivers! Keeping an eye on this graph is like keeping an eye on the nation's fuel gauge. When it starts dropping below the average range, watch out for high gas prices!

One Person Commuter Cars

Here is another vision of a gas sipping future. According to Rick Woodbury, inventor and developer of the Commuter Car 88% of all cars doing the daily haul in to work carry one person. That means that most of the road space in the morning and evening commutes is being taken up by empty seats. His solution is a small, one person electric vehicle that is not much larger than a big motorcycle. It has an energy usage equivalent to using 1.0 gallons per hundred miles (GPHM) which is good. It also has a price tag of $120,000 which is bad.

Although a one person vehicle selling at more than a hundred thousand is never going to become the commuting choice of the masses, the concept gives us a glimpse of what a fuel economy conscious future could look like. I believe that to get high fuel economy we will turn to a range of cheap vehicles each designed to perform one and only one function very efficiently. It is possible that we will see something like these single occupant electric cars widely used to get to and from work in the not so distant future.

Peak Oil Means the End of Production Growth

Back in the 150th anniversary of oil drilling and peak whiskey posts we talked about the problem of Peak Oil. The problem is that we are going to run out of growth in supply not that we will run out of oil. The graph above shows that ever since about 2005 the total oil output of the world has stayed more or less constant. It is a flatline with some fluctuations above and below. This flatline happened even though the price skyrocketed to almost $150. There are a lot of reasons to think this limit to production is geological and cannot be removed.

There is going to be absolutely no flatline in demand. The global population is still growing. The population of the United States is growing. The billions of people living in Brazil, India and China are experiencing rising standards of living and will want the vehicles that come with it. What happens when the supply stops growing and the demand grows and grows? Prices rise. A lot. Looking at the graph of global oil production lets us understand why.

The solution is that we have to find ways to save on gas. The focus for the future must be on reducing gallons used per hundred miles driven. If that means we have to settle for smaller less powerful vehicles, so be it. Those are all we will be able to afford anyway. Detroit should make gas mileage a top priority to stay alive and relevant in the decades ahead.

The Story of Peak Whiskey

The comment I got on yesterday's post about the 150th birthday of oil makes me think I have to talk about it one more time. The comment says the idea that the Earth will stop producing oil is nonsense. And the comment is right. The Earth will not stop producing oil. Except that is not the problem either.

Let me tell the story of peak whiskey. A hundred or so million years ago some guys set up a still that can make 1 barrel of whiskey per day. Then they build a giant glass to hold all this whiskey with a spigot down on the side to get it out. But something happens and it never gets used. Just stays locked up somewhere with the still on. Each day for a hundred million years that still pumps another barrel into the glass.

Until now. Now is when a down on his luck barkeep finds that giant glass of whiskey, holding billions of barrels of whiskey and that old still churning out another barrel every day. So he sets it up in the attic of his bar. When he opens the spigot just a little bit, a geyser of whiskey comes shooting out. Remember that the fuller a tank, the higher the pressure at the bottom and the more liquid will come out per second from a spigot.

So that old barkeep starts selling whiskey on the cheap. It is good whiskey but he has more supply than he can sell, so he sets the price low. People come and buy that whiskey up. Every year there are more and more people wanting that cheap whiskey. Now two things happen. As the demand goes up, the amount coming out the spigot per day is not enough. So the barkeep just cracks the spigot a bit wider and he meets the demand again. But over the decades as the whiskey glass starts to drain, the pressure at the bottom drops and the rate out the spigot drops too. But again the barkeep just cracks it a bit wider to compensate.

Decades go by. The pressure slowly drops more and more as the level in the glass goes down. The demand keeps going up and up. The spigot opens wider and wider. Until one day, the old barkeep goes to open it up a little more, and he can't. The spigot is already open all the way, far as it can go. The still up top is still pumping in a barrel a day. But the demand is now 80 million barrels a day, so the production rate is just too small to even notice. There is still lots of whiskey in the glass. It is about half full, so there are still billions of barrels of whiskey in there. It is just that he can't get it out faster than 85 million barrels a day.

His customers start wanting 90 million barrels a day. And every day the pressure is slowly going down. He has a bigger and bigger demand, and his supply per day is dropping. So what does he do? You got it. He raises the price. Because now he is not in a market where the supply is way more than the demand. Now there is more demand in the market than supply. Over the next decades, there is still whiskey to be had, millions and millions of barrels a year, but not enough to satisfy everybody. So the price just goes up and up and up.

Now the situation with oil is about the same. The Earth is still making oil as fast as ever, but that is only barrels a day. May as well be zero. We have billions and billions of barrels of oil still in the ground. But the rate we can get it out is flattening and will probably begin going slowly down. We will extract 80 million barrels a day for a good while still.

Now the idea is this: beginning about now, the supply of barrels per day is not going up any more. It will probably start going down. At the same time, China, India, Brazil and the rest of the world want to use more of it. A lot more. The result is going to be like with the whiskey: higher prices for oil and therefore gas. Even though the Earth will not stop making it and we still have billions of barrels of it. The shortage we are going to have is extraction rate.

These phases are common. Once you get a little older, you see that things come and go. A good example is with computer speed. Fifty years ago there were no computers. Then they invent them, and for about 30 years they got faster and faster. Remember in the 80's fast machines were a couple of Megahertz? That constant increase lasted a long time, but now it has stopped. Have you noticed how for about the last 5 years the speed hasn't gone much above 3 GigaHertz? That's because the engineers hit a wall ... making chips much faster than 3 GHz is not technically feasible right now.

But notice what happened. The computer industry changed course. When they couldn't make their chips faster, they made them smaller and put more than one together. Now you can buy quad core chips. Four chips, all at the same 3 GHz speed of five or six years ago. The lesson here for the auto industry is that times can change and they do change. The times of cheap oil and gas are on their way out. But that doesn't have to mean the end of the auto industry.

They have to adapt to the new course, like the computer industry did when chip speed stopped increasing. Any software company in the year 2000 that was developing a program that would only run on a 10 GHz single core chip would be out of business, because they were wedded to a course that stopped running. I think that is what is happening to Detroit. Detroit has always played by the rules that oil is cheap, and those rules are changing. If Detroit can't adapt to the new rules, they will vanish like the software company that needed 10 GHz single cores.

Happy 150th, Oil! So Long, and Thanks for Modern Civilization

August. 27, 1859 the first oil well in the world was sunk in Pennsylvania. Over the following 150 years, the energy provided by oil has allowed the development of cars, highways, plastics and and modern agricultural revolution. Now we are facing the end of that era. It looks like global oil production is now at an all time high - a phenomenon known as peak oil. From now on, the total oil produced every day will go down. Whether the decline is fast or slow remains to be seen, but down it will go. This means we will be forced to find a different path for the future. Either we must find new energy sources or learn to use less. In a time of concern over rising carbon dioxide levels we must make sure that any future change in energy sources is not a big CO2 producer.

I think the recently passed 150th birthday of oil is something we should all be aware of. The role that oil and modern fuels play in our lives is enormously important and despite that it is all to easy to not be aware of their impact. Better to at least know by name what you depend on!

IEA Economist Warns about World Oil Supply

Ever wondered if maybe oil prices and therefore gas prices will stay high forever? Today is not like 10 years ago: gas is expensive. The International Energy Association is warning us that gas may never be cheap again. In fact, it could get worse. This is due to a phenomenon known as peak oil. Due to the fact that all of the best oilfields are now used up, we have to get out oil from lower quality ones. The result is not that we are running out of oil, but that the rate we can get it up from the ground is going to go down. Imagine that you have a huge tank of water so there is no trouble with the amount. Now imagine that you can only get the water out through a pinhole. Although you have an unlimited supply, the tiny amount available per day will cause problems. The same thing might be about to happen with the world's oil. We will have huge, practically unlimited amounts of oil in the ground, but we will only be able to pump up a trickle each day.

Cash for Clunkers Ford's Hero

General Motors has received a lot of scorn for converting itself into "Government Motors" but we must remember that Ford has also needed Federal help to stay afloat. Whatever you think of the Cash for Clunkers program, the beancounters at Ford like it. This is the quote that says it all (from the article in the link):

We were having a good month — and Ford's been having some good months lately — but the (clunkers) program really put us over the top for sure.

The bottom line is that the US auto industry is suffering all around. Without the Feds stepping in to save the day, all Detroit would be underwater. If you ask why, I will tell you that one of the biggest mistakes Detroit made was ignoring fuel economy. The oil price spike was big news, but over the last years we have seen consistently high gasoline prices. It looks like this will be a constant problem in the future. The price of oil is still historically high and could easily go higher. Detroit has to wake up and start making cars that sip gas at a rate that people can afford to pay.