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.

Checking In On the Strategic Petroleum Reserve

Most US citizens have heard of the Strategic Petroleum Reserve. It is an emergency stockpile of crude oil maintained by the Department of Energy. It was initiated in 1975 as a response to the oil embargo earlier imposed on the United States in response to US involvement in the Yom Kippur war. Other countries also maintain petroleum reserves, for example China and Japan. The idea is that the Strategic Petroleum Reserve could keep the Pentagon war machine running temporarily even during a war in which all imports to the country were cut off. It is not meant to act as an economic buffer, helping to stabilize oil prices (by releasing oil at price highs and buying at price lows). The US Energy Information Administration maintains charts showing how much crude oil is in the reserve. A current chart is shown above. As you can see, there is currently somewhere about 700 million barrels of oil in the reserve.

2010 Oil Price Prediction

Do you have a prediction for what the price of oil will be throughout 2010? In case you would like to shop around and see what others are saying, the Financial Forecast Center has one. According to them, the price will cross above $100 sometime March and stay there until at least July, which is the last month for which they publish their public forecasts.

World Map of Peak Oil Production

Many of the oil producing regions of the world are in decline. The moment at which their oil production was greatest was in the past. The video shows a presentation which includes a time sequence showing oil production versus time for the major oil zones of the world. The hollow part of the bar at the top is the amount of production less than the peak production. Looking at the video you can see a lot of bars with hollow space at the top. Not a good sign for the future. Better that we learn to save on gas now before too many more of those bars go hollow.

OIl Producing Countries in Decline

Gas comes from oil, and it looks like very soon the global production of oil will not be able to satisfy the demand for it. This simple idea is known as Peak Oil. The International Energy Agency (IEA) has warned us that the day of supply less than demand is coming. Here is data taken from the IEA Oil Market Report of September 2009 showing the declining output in some oil producing countries.

Oil Producing Countries With Declining Output

Country	Year (Million Barrels per Day)
	1998	2003	2008
Nigeria	2.11	2.15	1.95
Venezuela	3.12	2.36	2.35
United States	8.37	7.83	7.52
Mexico	3.50	3.79	3.16
United Kingdom	2.84	2.28	1.56
Norway	3.14	3.26	2.46
Australia	0.71	0.67	0.56
Indonesia	1.55	1.71	1.03
Argentina	0.90	0.83	0.75
Colombia	0.82	0.55	0.59
Oman	0.90	0.82	0.75
Yemen	0.40	0.45	0.31
Syria	0.57	0.53	0.39
Gabon	0.35	0.25	0.21
Egypt	0.87	0.71	0.65
Totals	30.15	28.19	24.23

Lower production of oil means less gasoline, which in turn means much higher gasoline prices. As each new country sees its production decline it will necessarily go looking for imports. The more importers there are in the market, the higher the oil price. These numbers are good motivation for starting to save on gas now!

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!

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.

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.