Fun with Gasoline Prices

Whether or not OPEC is dead (see here), today's gasoline prices are in line with simple inflation. Which means, I assert, that supply and demand are pretty much matching up.

Fifty years ago, a gallon of regular gas cost $.33. Adjusting for inflation, the current price ought to be $2.53. In my area, the current price is hovering around $2.55 in most regular retail outlets +/- a couple of pennies. Might be slightly higher in your area.

You might ponder the additional costs placed on refineries since 1964 in order to decrease air pollution which is being passed on to the consumer.

You probably are also aware that the retail price of gasoline has swung widely over the last few years. See the chart below:

Does supply drive down prices? Well, yes, supply and refinery capacity.

Probably can't drive prices low enough to starve ISIS, though. See here.

Energy News: Why you will pay more the gas pump soon

The U.S. Energy Information Administration report on causes at Rail congestion, cold weather raise ethanol spot prices:

Extremely cold temperatures this winter led to rail congestion in and out of midwestern terminals that delayed shipments to other regions and resulted in significant ethanol stock draws. Railcar dwell time, the time that loaded railcars spend in a terminal awaiting movement, at Burlington Northern Santa Fe Corporation’s Galesburg, Illinois terminal, which handles many ethanol cars from Iowa, nearly doubled in early 2014 to reach a peak of 60 hours in February and remain above year-ago levels.

While more than 70% of ethanol producers are equipped to load unit trains (trains running a single product), only about 35% of gasoline blending terminals are equipped to receive them. The average speed of manifest trains (trains running multiple products), which are often used to deliver ethanol to gasoline blending terminals that are not equipped to handle unit trains, decreased by 23%, from 22 miles per hour (mph) to 17 mph over the past 12 months.

Ethanol stocks were drawn down nationwide by nearly 2 million barrels (bbl) from mid-February to mid-March, partially recovering to 15.9 million bbl on March 28. This is more than 4 million bbl below typical March levels, which averaged more than 20 million bbl from 2011 through 2013. East Coast inventories were especially hard hit and on March 14 reached their lowest level (4.5 million bbl) since EIA began recording data in June 2010.

Ethanol, the gift that keeps on giving.

The EIA has a nice graph, though: 

Source: U.S. Energy Information Administration based on Oil Price Information Service (ethanol prices) and Thomson Reuters (RBOB prices).
Note: RBOB is reformulated blendstock for oxygenate blending gasoline, a motor gasoline blending component intended for blending oxygenates to produce finished reformulated gasoline.

UPDATE: Oh, "Illusion of Climate Fixing?" (that a label below) see "Downsides of ethanol spur Obama to urge reduced usage" from 2013:

The Obama administration on Friday proposed to reduce the amount of ethanol in the nation’s fuel supply for the first time, acknowledging that the biofuel law championed by both parties in 2007 is not working as well as expected.

I hope to shout. Pay more, get less. What a country.

Gasoline prices? "More regulation is, in fact, not always good"

Oil and Gas Journal editor speaks on the rise in the price of gas at the pump, which may become permanent. Watch this boringly titled piece "More gasoline price elevation due from Tier 3 regulation":


The regulatory scheme meant to assure air quality has long since passed the "low hanging fruit" and have now moved into the "great cost, low impact" zone.

UPDATE: Nice following editorial "Fright in perspective":

Fright is the go-to tool of environmental activism. When pressure groups want to stifle something—oil well drilling, pipeline construction, whatever—they first arouse fear about the activity among local populations. Then they besiege public officials with their coalition of the frightened.
***
Industrial societies must be able to assess the industrial activity central to their progress with informed judgment. Those too easily frightened lose that ability and too readily foreswear work.

Rumors of ghoulies and ghosties have long been used to keep people scared - and under control.
If you don't think so, try telling the "true believers" you are a man-made global warming agnostic.

Energy: The Price of Gas at the Pump

From our friends at the Energy Information Administration, the components of the price you pay for gasoline at the pump, first, the definitions:

Crude Oil - the monthly average of the composite refiner acquisition cost, which is the average price of crude oil purchased by refiners.

Refining Costs and Profits - the difference between the monthly average of the spot price of gasoline or diesel fuel (used as a proxy for the value of gasoline or diesel fuel as it exits the refinery) and the average price of crude oil purchased by refiners (the crude oil component).

Distribution and Marketing Costs and Profits - the difference between the average retail price of gasoline or diesel fuel as computed from EIA's weekly survey and the sum of the other 3 components.

Taxes - a monthly national average of federal and state taxes applied to gasoline or diesel fuel.

Then the graphic:

Now, you want relief at the pump? First, reduce the 12% tax burden, which does not include, by the way, the tax burden to the producers, refiners, marketers, truckers, pipelines, etc. on their "profits" in getting the gas or diesel to the pump. No, it's the 12% most noticeable to the consumer because it's at the pump. That's a $.35 per gallon reduction off the top if it were eliminated.

And, if you were to really reduce the corporate income tax paid by all the entities involved in getting the gas to the pump (about 35%), you could see a further drop in gas prices.

And, if you could increase the amount of crude available, the price would drop - so, you could increase drilling, add a pipeline to Canada, etc. then the crude oil component would drop in price.

Or, you could curse the oil companies and demand hearings into their "obscene" profits or argue that the price is still too low and that a higher price at the pump would force Americans to conserve, switch to alternatives and become like Europe. High speed trains to nowhere for everyone!

Finally, there are graphs that show the price of gas adjusted for inflation. See here. I note that the price information is not adjusted for tax increases on the gas. That would be an interesting chart.

Definitions from the EIA:

Real price: A price that has been adjusted to remove the effect of changes in the purchasing power of the dollar. Real prices, which are expressed in constant dollars, usually reflect buying power relative to a base year.

Nominal price: The price paid for a product or service at the time of the transaction. Nominal prices are those that have not been adjusted to remove the effect of changes in the purchasing power of the dollar; they reflect buying power in the year in which the transaction occurred.

Info on the EIA chart :

Real Petroleum Prices are computed by dividing the nominal price in a given month by the ratio of the Consumer Price Index (CPI) in that month to the CPI in some "base" period. The Real Petroleum Prices spreadsheet and charts are updated every month so that the current month is the base period in the monthly price series. Consequently, all real prices are expressed in "current" dollars and any current month price may be compared directly with any past or projected real prices.

What is shown, as I understand it, is that for years the price of gasoline at the pump was less than that that would have been expected due to inflation. In recent months, the price has caught up with inflation. For example, the nominal price of gas in the 1980 period was $1.20 per gallon. The inflation adjusted "real price" was $3.40 in today's dollars. The current "real price" is $3.60 and the actual ("nominal") prices is about the same. In short, the price of gas at the pump today is almost the same as the effective per gallon price was in the 1980's. Further, for all that period between 1980 something and 2009, the effective price at the pump of gasoline was below the rate of inflation - gasoline costs were a decreasing part of your budget.

Until 2009.

Hmm. What could have happened in 2009?

 Feel free to correct me in the comments if my understanding is incorrect.

Gasoline prices

Just in case you haven't noticed at the pump, Chart of the Day reports Gasoline prices top $3 per gallon:

The price of a barrel of crude oil has traded sharply higher over the past 4 1/2 months and currently trades above $91 as a result of continued geopolitical tensions and oil suppliers struggling to keep up with demand. With oil prices trending higher, it is not all that surprising to find that gasoline prices are following suit. Since the financial crisis lows at the end of 2008, the average US price for a gallon of unleaded has risen $1.42 per gallon. When adjusted for inflation, gasoline prices are once again above three dollars per gallon -- a level not often seen over the past three decades.

Gasoline prices

Gasoline prices up over 60% - Chart of the Day:

So while gasoline prices are currently well below the record high levels of 2007, this recent rally has brought prices to a level well above what was witnessed from 1984-2004 ñ a two decade span of relative energy price stability.

Why are gas prices increasing? WSJ says it's due to the possibility of increased consumer demand:

Oil prices are jumping on the hopes of an accelerated economic recovery.

The kindling for that flame came from the U.S. Federal Reserve, which talked about the U.S. economy “leveling out.” It was fueled further by euro-zone economic data, as Germany and France are growing again (and a 0.3% growth rate is almost boom-time for those two).

But, as the article notes, this may be "irrational exuberance" -

Never mind that crude oil inventories in the U.S. are still growing (what summer driving season?) or that retail sales are still falling.

One way to curb your enthusiasm - looking into the future:

According to NSWA, by the end of President Obama’s current term in office (2012), restrictions put in place will likely reduce future oil output by 1.32 million b/d (15.4 percent) and natural gas by 8.9 percent annually. By 2019, restrictions and new taxes could have reduced the federal take from oil and gas production by more than $118 billion, or about 4 times the expected yield of the new taxes. By 2030, these proposed policies will have the effect of lowering oil production in the United States by over 3 million b/d (approximately 28 percent) and natural gas by 30 percent.
Also, by 2030 the cumulative reduction in federal tax take from the oil and natural gas industry could be more than $780 billion, under current administration policies.

“The decreased production that will result from the proposed tax increases will have a catastrophic effect upon the American consumer since less domestic oil means higher prices,” said Dewey Bartlett, Jr., chairman of the National Stripper Well Association. “The OPEC leadership will have almost exclusive control over the world-wide pricing of crude oil as well as all products refined from crude oil such as gasoline, jet fuel and diesel fuel. Each of the thirtyplus states that have oil and natural gas production will experience a sharp decrease in tax revenues and significant job losses. A vital domestic industry that today helps fuel our national
economy will become an insignificant creator of American jobs much like the shipbuilding, electronics and clothing industries. The consequences of the demise of our domestic oil and natural gas industry are beyond imagination.”

Lower tax revenue in a time of growing deficit spending, higher fuel costs and an increase in dependence on foreign crude - what a change!

Of course, if the current administration believes that all of the dire warnings of the NSWA chairman will come to pass but the result of higher oil prices will be to unleash a huge increase in demand for alternative fuels, more fuel efficient cars, more green technology - all of which would lead to a decrease in domestic oil consumption and a resultant "energy independence" from OPEC as demand for overseas oil goes down, the result of which will eventually be an increase in tax revenue and more green jobs, then, well, in the long run these tax increases may make some sort of sense. As in "forcing change" from above - by raising energy prices so high that alternatives make economic sense. In effect, "taxing" Americans into going green.

From an environmental view, however, it seems to me that the administration would have to be very naive to believe that global warming, if it exists, would be reduced by reducing U.S. consumption of crude oil. Dumping onto the market large amounts of oil that the U.S. isn't using simply means a lowering of crude oil prices for the rest of the world, and encourages other countries to replace the U.S. as a consumer. The worldwide demand for oil will not decrease. Indeed, with lower prices, there may be more development in countries without the U.S. standards for air and water quality and there may be an increase in "greenhouse gasses" as a result of the U.S. going "green." The law of unintended consequences may rear its ugly head yet again for this Administration.

On the other hand, there are only about 2 years before the next presidential election cycle kicks in, 6 months before Congressional campaigns start - and short term pain at the pump may cause the American people to vote a different vision of the future into place.

Running on empty? Here's a good explanation

From the Christian Science Monitor- Post-Ike gas shortage may take weeks to end:

Getting supplies back on track has been made more difficult by more perennial problems – a shortage of regional refineries, an energy policy that demands nearly 200 boutique fuels to meet air quality standards, and a tangled middleman distribution system of gasoline "jobbers" seen as a weak link in the government's ability to control the economy's critical fuel link.

"The whole situation does point up the need for additional refining capacity in the country," says Ray Perryman, a Waco, Tex.-based energy economist, in an e-mail. "Even in a time of moderating demand, we do not have the ability to overcome even the interruptions that are inevitable. I am not sure I would call the frailties new, but they have certainly been brought into sharp focus."
***
There are still 15 refineries in the Gulf that are not at full production – with six not yet operating at all in the Port Arthur and Texas City area of Texas – mainly due to extended power outages in the wake of hurricane Ike. The Colonial Pipeline, which makes a deep arc from the Gulf, through the South, and up into New York, is running far from capacity, and dealers are anxiously awaiting supplies that run only at 5 miles per hour through the pipeline.
***
"These boutique fuel requirements that are legislated in so many states are counterproductive at times like this," says Mr. Laskoski. "It would also reduce costs if you could create more of a commodity item rather than a specialty item."

On Tuesday, 20 tanker ships full of gasoline refined in Europe were diverted from the Atlantic Coast to the Gulf in order to bolster supplies.
***
But Mr. Baen, the UNT industry expert, says tough stances on price gouging may have exacerbated the shortage as jobbers focused on getting gas to areas that were easier – and cheaper – to reach. Without financial incentive to get to outlying areas, those pumps simply remained dry.

That's what seems to have happened in the mountain city of Asheville, N.C. With many independent dealers and jobbers facing long distances over steep grades, distributors with limited supplies chose their routes based on what was expedient – and profitable.

Gasoline Prices

Chart of the Day has an inflation-adjusted chart of gasoline prices here, accompanied by this:

... Over the past four months, the average US price per gallon of unleaded has risen over one dollar per gallon. When adjusted for inflation, gasoline prices are at record highs and 18% above its old inflation-adjusted peak of 1981. Also, as illustrated by the today's chart, gasoline prices have spiked above a trend channel (see red line) that has been in existence since the beginning of the century."

But before going all crazy, revisit this earlier post with the other chart explained.

Gasoline Prices in Perspective

A couple of years ago, the CATO Institute performed a nice but hardly noticed public service when they published Gasoline Prices in Perspective by Jerry Taylor and Peter Van Doren, with the neat graph which I have modified slightly:

America appears to be in a state of wild-eyed panic about the rising price of gasoline. Talk radio hosts and T.V. populists apparently think that mass riots are imminent and that whole cities will burn unless politicians do something to save America from the long, dark economic night that is descending upon us.

In truth, gasoline prices today are taking less of a bite from our pocketbooks than has been the norm since World War II.
For instance, let's look at 1955, a year most of us associate with big cars, big engines, and cheap fuel – automotive glory days, as it were. Gasoline sold for 29 cents per gallon. But one dollar in 1955 was worth more than one dollar today. If we were using today's dollars, gasoline would have cost $1.76 per gallon in 1955.

Gasoline now costs around $3.00, so we are worse off than in 1955, right? No. Because we were poorer in 1955 than we are today, $1.76 then had a bigger impact on the pocketbook (that is, it represented a larger fraction of income) than $1.76 today. If we adjust gasoline prices not only for inflation but also changes in disposable per capita income (defined as income minus taxes), gasoline today would have to cost $5.17 per gallon to have the same impact as 29 cents in 1955.

Let's pick another year we associate with low gasoline prices – 1972, the year before the Arab oil embargo. Gasoline was selling at 36 cents per gallon. Adjusted for inflation, however, the price was actually $1.36 in today's currency. Adjust again for changes in disposable per capita income and the price would have to be $2.66 per gallon to have equivalent impact today.

Were we better off then when we rolled into the filling station in 1972 than we are today? No, because our cars get 60 to 70 percent better mileage today than in 1972 (22.4 miles per gallon versus 13.5 miles per gallon). That more than offsets the 10.5 percent increase in gas prices adjusted for change in inflation and income from then to now.

Now let's look at 1981, the year Ronald Reagan took office. Gasoline sold for $1.38 that year, the equivalent of $2.74 in today's currency. Adjusting for the change in disposable per capita income, prices would have to be $4.30 today to have an equivalent impact.

Click on chart to make it bigger. Adjust for inflation and increases in income since 2006.

Of course, in 1955, there probably weren't as many 3 and 4 car families as there are now...

Gasoline Prices

From www.chartoftheday.com

Today, the price of a barrel of crude oil closed just shy of the $110 level as geopolitical tensions continue and oil suppliers struggle to keep up with demand. With oil prices rising, it is not all that surprising to find that gasoline prices are following suit. Over the past six months, the average US price for a gallon of unleaded has risen 51 cents per gallon. When adjusted for inflation, gasoline prices are at 27-year highs and within 2% of the inflation-adjusted peak of 1981.

According to this article, soem experts predict gas prices may fall. Or not:

Crude oil may fall this week as imports increase and US refiners operate at below-average rates, bolstering inventories.

Fifteen of 28 analysts surveyed by Bloomberg News, or 54 per cent, said prices will drop through April 18. Eleven of the respondents, or 39 per cent, said futures will rise and two forecast that prices will be little changed.

A week ago, 47 per cent said oil would decline.
***
This is the 14th straight week that analysts have forecast a decline in prices. The oil survey has correctly predicted the direction of prices 50 per cent of the time since its introduction in April 2004.

You can achieve the same level of accuracy by flipping a coin...

Platt's notices a "disconnect" between gasoline prices and crude oil supply in a podcast here.

Back to the basics: "A Primer on Oil Prices"

Pretty good primer, too, at A Primer on Oil Prices:

Wonder why gasoline costs more? In order to fulfill various air pollution reduction plans, gasoline and diesel must be refined into some 17 different formulations. With three grades of gasoline, that means that refiners must produce some 45 separate blends. That’s expensive and the cost is, of course, passed along to consumers. Since demand outstrips production capacity, weekly gasoline imports more than doubled between 1992 and 2004.

The mandate to include the gasoline additive, ethanol, largely made from an ever-increasing amount of the nation’s corn production, further adds to pain at the pump. The irony here is that it drives up the cost of food while reducing the mileage available from a gallon of gasoline with this additive. As a result, oil refiners have cancelled an estimated 40 percent of planned expansions, reducing potential new output from 1.6 million barrels per day to less than 1 million barrels daily.

The hard math of a growing U.S. population, plus the fact that petroleum accounts for about 40 percent of U.S. energy supply, two thirds of which must be imported, means that Americans are caught in a government designed energy vice. American transportation runs on oil. It accounts for about 28 percent of U.S. energy use.

As America’s infrastructure of roads and bridges ages, a two-year study by the National Surface Transportation Policy and Revenue Study Commission recently urged Congress to raise the tax on gasoline by as much as 40 cents more per gallon.

At the same time, the latest energy bill has increased Corporate Average Fuel Economy (CAFE) standards to require vehicles to get 35 miles per gallon by the year 2020. Analysts project an increase in the cost of buying a new car between $900 and $10,000 depending on which expert is consulted. The only way to achieve this is to drastically reduce the weight of a car, thus increasing the potential for a lethal accident and more dead Americans on the highway.

Make sure you send a "thank you" note to your elected representatives. You might also mention that you really appreciate the increase in food prices caused by the ethanol mandate.