Category: energy

Why are gas prices still high? A primer on oil commodities and currencies

Lisa Schweitzer1 Comment

There’s a pretty big difference between the price of crude oil and what we are seeing at the pump. I get questions from reporters on pretty much a daily basis, and I have to refer them elsewhere as I am not an expert on the subject. However, there are some issues here that are worth discussing, and some definitions that most people probably never see unless they are oil investors.

First off, as bad as things are in the Eurozone right now, it’s hard for me understand exactly why the dollar is still so weak. Yes, we’ve proved that we are going to pursue austerity policies when we shouldn’t, and that we aren’t terribly good at governing ourselves, and our August job numbers make me want to tear my hair out. But we’re still better than Italy and Spain, darn it!

Anyway, that weak dollar is going to affect import prices, and that has to be part of the story. However, for people who are arm’s length watchers of world oil prices, there’s a puzzle: the price of crude has generally gone down, while gas prices have stubbornly remained high.

So let’s get some definitions down.

Reference world oil markers:

WTI. WTI is West Texas Intermediary crude, and it is used as benchmark in oil pricing. It is the base commodity for The Chicago Mercantile Exhange’s oil futures. There are other crudes that investors talk about:

Dubai Crude. This is just what it says it is: it’s used as benchmark because Dubai is consistently friendly and the oil is available for sale in world markets immediately, and it’s the only oil marker from Persian Gulf sources where these factors are consistent.

The OPEC Reference Basket is exactly what it sounds like. It’s a weighted average of the prices of products from OPEC member nations. There are a bunch of factors that go into the constructed average, all of which are based on the most representative products from all the member nations: Bonny Light oil from Nigeria, for example, Kuwait Export, Iran Heavy–BCF 17 (Venezuela).

Brent Crude. Brent crude is, simply, oil from the North Sea. It’s also used as a marker, and it’s an important one because it is used out of the London Exchange.

So there is an anomaly going on right now, and it has been ongoing even before Libya started undergoing significant political change. It has to do with the price of differences between Brent and WTI crudes. WTI is trading at about $85/barrel. (Go look at these fabulous charts). Brent crude is trading, by contrast, at $112 a barrel. See Bloomberg.

The reference to Cushing refers to Cushing, Oklahoma, an oil trading hub.

So why the difference? The currency issue I think is the kicker: the pressure on US crude production probably means that Cushing is clearing as much as oil for trade as it possibly can, and thus buyers have to go to the higher price Brent crude for refining to gasoline. It’s hard to write this all into Libya because it preceded the changes there by quite a bit of time. Perhaps it is multiple causes.

That’s my best guess, folks. Otherwise, I got nuttin’.

Obama’s new CAFE Standards as a tax break

Lisa Schweitzer

Eagle-eyed reader Don C referred me to this nice Op-Ed from the statesman.com Ready for an Obama Tax Break: TxDOT might not be by Ben Wear. The key point:

Hang on first for some math.

Let’s say a Pflugerville physics schoolteacher drives 15,000 miles a year and, by coincidence, has a car that averages right at that 28 mpg existing standard. She would need 536 gallons to do that.

She pays both a state gasoline tax of 20 cents a gallon (which hasn’t increased since 1991) and a federal gasoline tax of 18.4 cents a gallon (locked in since 1993). So her annual tax hit (paid invisibly at the pump) is $107 to the state and almost $99 to the feds. So, about $206 a year.

With a 56 mpg car, her total tax would be $103. Oh, and at $3.40 a gallon (and subtracting the gas taxes), she would save another $800 by buying half as much gasoline.

But here’s the problem, from a statewide perspective. TxDOT, which gets about three-quarters of that state gas tax revenue and about the same percentage of what Texans pay in federal gas taxes (because a quarter of it, unfairly in the eyes of Texas officials, is then distributed to other states), would lose a couple of billion dollars a year. Ouch.

I had to look up Pflugerville.

Finance folks in transport have seen this train coming for some time. The GAO issued a report in 2009 discussing the issue of improved fleet fuel economy on Federal coffers. Most of us have argued we should go with a mileage fee, or usage subscriptions for autos. Both of which could be handled by leases to private companies.

A primer on CAFE standards and “Better Than Nothing” Policies

Lisa Schweitzer5 Comments

My brilliant colleague, Richard Green, an economist, is acting like an economist about CAFE standards over on his blog. I have a retort, though an addled one. Peter Gordon, another brilliant and genteel colleague of mine, has also weighed in. Economists agree: a carbon tax is the way to go.

CAFE stands for Corporate Average Fuel Economy standards. It’s one of those regulations that people tend not to understand terribly well because the rules are complicated. Here’s a nice overview by NHTSA.

President Obama, like just about everybody else for the past 20 years, wants to raise CAFE standards. For passenger vehicles, Obama wants to go from 25 mph to 39 mph by 2016 (that gives us 5 years to get there).

The rules pertain to a harmonic mean fuel economy of the fleet of cars that a manufacturer produces in a given model year. During the SUV craze (which doesn’t seem to be over if west-side Los Angeles is any indicator), US manufacturers could cash in on gas guzzling SUVs because they were not really considered passenger cars (defined by a weight of 8,500 pounds). The original limit was intended to keep farm and industrial equipment exempt from regulation, such as medium-duty trucks used by farmers and contractors. The wrangling over getting a set of light-duty truck fuel standards (for urban SUVs, used almost exclusively as commuting vehicles) took us a decade, and the damage was done. SUVs not subject to the standards have already penetrated the US fleet, where they will stay on average for 7 to 12 years. We have to make sure those glitches are gone if any revamped regulation–at all–is to be effective in raising fuel economy.

The penalties for CAFE noncompliance have also not risen concomitant with inflation. BMW and Mercedes famously have paid CAFE fines just about every year from 1983 to just recently (2008, largely because of the recession affecting their US sales). Right now, I believe manufacturers have to pay $55 for each vehicle they sell per each 1 mpg below their fleet target. Those types of penalties can be relatively small, and for luxury importers like BMW and Mercedes, they can easily pass those costs along to their buyers.

Automakers can get thus around the law–that’s a problem. And in addition, some economists have argued that by forcing fuel economy, cars became less safe than otherwise:

Lave, Charles and Lester Lave, “Fuel Economy and Auto Safety Regulation: Is the Cure Worse than the Disease?” Pages 257-290 in Essays in Transportation Economics and Policy: A Handbook in Honor of John R. Meyer, edited by Jose Gomez-Ibanez, William B. Tye, and Cliffor Winston, Brookings Institution Press, Washington D.C., 1999.

(aka one of my favorite transportation books of all time).

The argument: cars had to get lighter and thus they got less crash-safe.

As a result, CAFE has few friends other than environmentalists, and many environmentalists I think have stopped advocating around car technology in favor of advocating for Smart Growth or the New Urbanism. After all, raising fuel economy just makes cars less expensive to use, and that flies in the face of the ideas behind these two urban models.

So here are my problems, in a set of bullet points:

1) Yes, absolutely, a carbon tax or simple higher petrol taxes would accomplish the same thing as revamped CAFE standards, and at lower cost. However, I don’t see how a tax would avoid the same safety issues that Lave and Lave (1999) talked about. The basic engineering principles mean you go lighter if you want to use less fuel; we don’t have any strap-on technologies analogous to the carburetor in 1980s or fuel injection that we can turn to. The alternative would be more hybrids, which are also lighter.**

2) Tax aversion pretty much seems to be controlling the world of US policy right now. I’m told that any and all taxes, even ones that would be good for us like most Pigouvian taxes, are off the table, forever and ever, amen.

3) So that means we are left with fuel economy regulation or…nothing?

4) Nothing may have fairly steep consequences. By far—BY FAR–the most effective thing we could for climate change emissions reduction in transportation is improving the fuel economy of the passenger fleet on the road for the next 20 years. Not even in analyses written by the most religious New Urbanist/Smart Growthy people can fudge the fact that most substantial, most immediate gains to be had in climate policy come from changing fuel economy as VMT changes marginally in response to built environment changes, and those built environment changes are happening slowly–even more slowly now that the recession has become permanent.

5) So, yes, it’s costlier and more convoluted to regulate cars via CAFE, but if it’s the only game in town, the additional costs associated with raising the fuel economy of the fleet becomes the price tag of tax aversion—not the fault of the second-best policy. It’s a legitimate democratic choice for voters to prefer to avoid taxation in favor of a costlier strategy. We can’t blame the costlier strategy for being costlier if the optimum isn’t the optimum according to voter preferences. I didn’t make up these rules: but Americans would rather pay more overall for fuel economy changes than pay taxes, well, that is what it is.

This “better than nothing” is the argument made to me for years about congestion pricing. Voters hate it; we aren’t going to do it. So we’re going to build lots of trains to alleviate congestion, and those trains will, in turn, be underused because we’re not pricing autos properly. But building and running half-empty trains is a “better than nothing” policy.

I’m not sure what the answer is. But it’s a debate worth having.

**See comments for Gabriel Rossman’s referral to the Continuous Variable Transmission technology, which would allow for fuel economy improvements without going lighter. (I still wonder, though, because the models where the CVT has been employed aren’t taking us up the economy notches that a harmonic average of 39 would need to go–the Cube, the Maxima, etc. Remember that this is a harmonic average. You have a number of ways of achieving it, and one of the most expedient is chopping off your lower tail of the distribution of models you are producing.)

Scown et al. in ES&T on the water footprint of US transportation fuels

Lisa Schweitzer

Environmental Science and Technology has free access to their water issue. It says that free access expired 6/24/11, but I could still access the articles this weekend, so maybe they will forget to take the access away for a little bit.

Those of you with an interested in water should go check it out.

One manuscript that caught my eye comes from Corinne Scown in CE at USB:

Corinne D. Scown, Arpad Horvath, Thomas E. McKone. Water Footprint of U.S. Transportation Fuels.
Environmental Science & Technology 2011 45 (7), 2541-2553

From their abstract:

In the modern global economy, water and energy are fundamentally connected. Water already plays a major role in electricity generation and, with biofuels and electricity poised to gain a significant share of the transportation fuel market, water will become significantly more important for transportation energy as well. This research provides insight into the potential changes in water use resulting from increased biofuel or electricity production for transportation energy, as well as the greenhouse gas and freshwater implications. It is shown that when characterizing the water impact of transportation energy, incorporating indirect water use and defensible allocation techniques have a major impact on the final results, with anywhere between an 82% increase and a 250% decrease in the water footprint if evaporative losses from hydroelectric power are excluded. The greenhouse gas impact results indicate that placing cellulosic biorefineries in areas where water must be supplied using alternative means, such as desalination, wastewater recycling, or importation can increase the fuel’s total greenhouse gas footprint by up to 47%. The results also show that the production of ethanol and petroleum fuels burden already overpumped aquifers, whereas electricity production is far less dependent on groundwater.

The last sentence is the takeaway. Electricity, again.

The Financial Times explains the IEA’s decision to release strategic reserves

Lisa Schweitzer

The Financial Times has an excellent discussion of the IEA, its history, and its recent move to release supply from western reserves. Particularly useful for students is the timeline of IEA actions.

It’s got a nice, clear discussion of the global implications of the move: the desire to avoid inflation being among the more prominent.

In today’s FT, Gavin Davies follows up, where he refers to this very nice paper from Christian Baumeister and Lutz Killian:

Baumeister, C and L Kilian (2011), “Real-Time Forecasts of the Real Price of Oil”, CEPR DP 8414.

Prices, simply, work

Lisa Schweitzer

For 40 years, the US has spent billions investing in transit systems hoping to get people out of their cars. We have obdurately ignored economists who note that pricing gasoline more appropriately with a gas price floor or carbon tax would raise the costs of driving, would give us revenues to invest in public transit, and would do what everybody wants everybody else to do—stop driving gas guzzlers and stop driving so much.

Instead, we’ve built and built transit that has underperformed for years simply because driving is still so cheap. But we haven’t invested probably enough to prepare for the demand for public transit because we don’t have the revenues to do so, partially because we’ve stuck to the policy of keeping gas cheap.

Argh.

Stupid, short-term thinking.

The Financial Times has a series of very good articles recently on where we are.

Gasoline consumption shrinks vis-a-vis higher prices (what? REALLY?? HOW CAN THAT POSSIBLY BE?) as US Congress questions $2 billion in tax candy handed out Big Oil.

Gas prices spur inflation (of course they do, if everybody is getting around by car, everything from labor to other inputs are higher in prices)

And it’s not helping the trade deficit (again, basic math)

Does it matter what car Dr. Lisa Drives? And Gabriel Rossman on the environmental silly

Lisa Schweitzer3 Comments

My apologies: it’s rather pompous to refer to myself as Dr, but I have a lot of Asian PhD students, and I really enjoy them, and one of their common traits is that they really prefer to show you respect by using your title, but almost none of them can linguistically manage all the consonants strung together in “Schweitzer”, so they usually wind up calling me Dr. Lisa, which I find wonderful and charming. It’s like being Dr. J!

My husband and I were briefly considering replacing our car, which is over ten years old and a two-door. One of my friends–a pushy one, who likes to think she gets to tell me what to do, said, “You SHOULD get a hybrid.”

She herself is a Toyota Pius driver.

I said that I was uncomfortable spending on a car what most hybrids cost. I did the calculation, even with higher gas prices. Given how little Mr. Miller and I drive, it would take close to 23 years to break even.

Why can’t we just get a small, cheap, four-door ICE and continue driving very little?

The pushy friend responds: “Well, but you’re supposedly an environmental professor!”

But I take the bus for 30 percent of my trips, walk for the remaining 50, and only have Andy drive for about 20 percent of our short trips. She has a hybrid, but she drives everywhere she goes.

Isn’t there a point where hybrids are like diet cookies? Yes, good job, lower calories and what not. But the cumulative effect can be the same or worse, regardless of what the marginal effect is.

(Economists call this concern the “rebound effect”. It’s cheaper to drive a hybrid so you drive more than you do with a car that costs you more per mile.)

I already did a major thing for the environment: I didn’t have any American kids. There are two less American kids in the world because Mr. Miller and I did not replicate ourselves.

In terms of numbers, that’s far more likely to save the planet gobs and gobs of environmental harm than anything else I do ‘for the environment.’ (This is not to say that nobody else should have kids. It is to say that not doing something is often just as good for the environment as doing something. Like not driving much versus driving a hybrid a lot).

Gabriel Rossman over at Code and Culture sends up a piece in Sunset magazine that has a pictorial of a concept for a dining car in an LA-SF bullet train. As he notes:

Instead, let’s think about the dining car itself. The pictorial shows a dwarf citrus tree in the car for passengers to pick fruit either to eat out of hand or for juicing. (As the owner of an orange tree, I can tell you that the pictured dwarf tree would make about two carafes of orange juice). Similarly, there is a “Self-Harvest Salad Bar. Snip and dress your own organic greens from a hydroponic vertical garden and choice of on-tap vinaigrettes.”

Do we really want people handling scissors on moving trains, just to cut their own lettuce?

My favorite part of the rant:

As I fumed about this, I realized that this isn’t just a really stupid idea for a train’s dining car, but a reductio ad absurdum of the whole idea of locavorism.

I love that line. It pretty much sums up the whole problem when people design to optimize on one dimension.

For many conservatives in the US, the bottom line is that all the enviro-babble surrounding us has lost sight of other priorities, like employment, freedom, economic security, and not giving people on bullet trains sharp tools with which to perforate themselves and others simply to satisfy some socio-cultural design notion of how/what people should eat. WTF? What if I don’t like vinaigrettes?

Wouldn’t it be better to not eat vinaigrette, since it’s not locally made?

And so on, to insanity.

How about we concentrate on some of the big environmental issues, instead of always creating narratives about *ourselves* and what *we* do–or don’t–for the environment?

Transit and energy

Lisa Schweitzer1 Comment

The Melbourne Urbanist, Alan Davies, commented on my commentary about rail cost benefit analysis:

I don’t fully get your argument about the relative impact of high energy prices on transit agencies and drivers, maybe you could expand on that one day?

Happy to.

Of course higher energy costs will affect drivers–we see it all it the time as gasoline prices change. If we can get our transit vehicles full of people, there’s no doubt that we can use less energy per person than if every person uses a car.

So the “relative impact” here in Alan’s question has more than one dimension. On the one hand, many transit advocates believe that higher energy prices are good for transit companies because it changes the relative prices between transit and cars. And transit companies sometimes do very clever things, too, to help reinforce that point: LA Metro, for example, is lowering its fares and doing a bunch of other promotions over the summer to try to get more gas-shocked drivers to jump on board. For transit companies operating half-empty vehicles, the marginal cost of serving another person is very small. If you are operating the vehicle anyway, it’s better for you if it’s full. For advocates, increasing the demand for the service is where they begin and end thinking about transit operations (and this has been a pressing issue, but it’s not the only issue.)

However, transit companies will also feel a pinch in higher energy costs in their operating expenses. Transit companies have a lot of energy-related costs, not just costs associated with powering their service. Even if all their own employees take rail transit (which they don’t, which means that transit companies will have to compensate labor differently than in low-cost energy contexts), they have maintenance and construction obligations, and all of those inputs rely in turn on energy inputs that are unrelated to the relative efficiency of transit itself as a mode.

While we can be happy about the energy efficiency of rail transit, high energy prices will hit transit companies every time they deploy service vehicles (a lot in big systems) and with every construction and maintenance project that requires materials (all of them).

The transit company’s service, then, may be cheap relative to driving, but the agency’s fixed and operating costs are going to go up vis-a-vis higher energy costs.

Transit companies are therefore going to be an environment where they are facing higher demand and higher costs. Because transit companies are not recovering a full share of the operating costs from passengers, the question for how well they fare under increasing cost and demand scenarios depends a lot on policy. Either they will raise fares (decreasing their price advantage over cars), find a stable and sustainable source of operating subsidy (my favorite), or they will cut service (or cut service and raise fares).

Finally, I don’t know why it’s so hard for people to understand that buses matter to operations. In all the rock throwing between bus rapid transit (BRT) and light rail, the very important role that buses have in supporting rail networks has gotten lost.

Even if people like me to stop objecting to every money-gobbling light rail project in every little podunk Portland-wannabe mid-size city that has been losing population since 1940, we still need good-quality bus services to support train operations, even in cities where the subways are king. Ever notice how many buses there are all over high-transit usage towns, even though there are a lot of trains?

Good quality transit requires both trains and buses, and buses require fuel. When fuel gets expensive, transit companies will feel that, too. Atlanta cut down its bus service after it invested in its light rail, and it lost riders instead of gaining them. That’s the sort of thing that could easily happen to places that cut their buses hoping that people will be able to make do with the rail service alone: in many, many systems, they can’t.

Econbrowser is worrying about oil prices, why you should, too

Lisa Schweitzer

Go read.

I have nothing to add to the discussion, except to congratulate the commenters on the quality of the responses (except for the person who insists on calling people “gentlemen”; sheesh. Do I get to read the comments even though I am a girl? Or will you get girl cooties? Or is it just no fun unless you can pretend commenting on a blog in 2010 is like lecturing at Cambridge in 1900? I’m not that grouchy about inclusive language when you can’t avoid it or when being inclusive makes the prose ungainly or cluttered, but why make a point of being exclusionary in a forum where you don’t have to be?)

Pay particular attention to the discussion of pricing changeover technologies.

But also keep in mind that oil gets used for a lot of economic production that doesn’t involve personal automobiles.


Making a (green) offer you can’t refuse

Lisa Schweitzer3 Comments

The mafia in Sicily is, apparently, trying to launder money through profitable green energy companies

ROME (Reuters) – Italy Tuesday seized Mafia-linked assets worth $1.9 billion — the biggest mob haul ever — in an operation revealing that the crime group was trying to “go green” by laundering money through alternative energy companies.

link: Italy seizes $1.9 billion of assets as Mafia goes green – Yahoo! News

It gets even better:

At the center of the investigation was Sicilian businessman Vito Nicastri, 54, a man known as the “Lord of the Wind” because of his vast holdings in alternative energy concerns, mostly wind farms.

link: Italy seizes $1.9 billion of assets as Mafia goes green – Yahoo! News

I argue that greenies will need to find a new platform because “green” has hit the mainstream as an accepted value just about everywhere. In this case, I suspect that the mafia are simply using the profitable businesses that are available to them, and those businesses happen to be green energy businesses. However, it is a nice sign that the businesses are doing well…