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

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’.

Saying goodbye to Lee Schipper

Very sad news. Lee Schipper, physicist and researcher with Lawrence Livermore and then founder of the sustainable transport research program at the World Resources Institute, passed away from cancer yesterday. He was a great speaker, a terrific role model, and wonderful writer on transportation and energy, and he will be missed.

Here is a link to his obituary at the WRI site.

Go read:

Are We Reaching Peak Travel? Trends in Passenger Transport in Eight Industrialized Countries (3.0MB PDF) Preprint of an article submitted for consideration in Transport Reviews © 2011

and one of my favorite papers of all time:

Measuring the long-run fuel demand of cars: separate estimations of vehicle stock, mean fuel intensity, and mean annual driving distance.

Two picks on climate change from Environmental Science and Technology

Role of Motor Vehicle Lifetime Extension in Climate Change Policy
Shigemi Kagawa, Keisuke Nansai, Yasushi Kondo, Klaus Hubacek, Sangwon Suh, Jan Minx, Yuki Kudoh, Tomohiro Tasaki, Shinichiro NakamuraEnvironmental Science & Technology 2011 45 (4), 1184-1191

From the abstract:
Vehicle replacement schemes such as the “cash for clunkers” program in the U.S. and the “scrappage scheme” in the UK have featured prominently in the economic stimulation packages initiated by many governments to cope with the global economic crisis. While these schemes were designed as economic instruments to support the vehicle production industry, governments have also claimed that these programs have environmental benefits such as reducing CO2 emissions by bringing more fuel-efficient vehicles onto the roads. However, little evidence is available to support this claim as current energy and environmental accounting models are inadequate for comprehensively capturing the economic and environmental trade-offs associated with changes in product life and product use. We therefore developed a new dynamic model to quantify the carbon emissions due to changes in product life and consumer behavior related to product use. Based on a case study of Japanese vehicle use during the 1990−2000 period, we found that extending, not shortening, the lifetime of a vehicle helps to reduce life-cycle CO2 emissions throughout the supply chain. Empirical results also revealed that even if the fuel economy of less fuel-efficient ordinary passenger vehicles were improved to levels comparable with those of the best available technology, i.e. hybrid passenger cars currently being produced in Japan, total CO2 emissions would decrease by only 0.2%. On the other hand, we also find that extending the lifetime of a vehicle contributed to a moderate increase in emissions of health-relevant air pollutants (NOx, HC, and CO) during the use phase. From the results, this study concludes that the effects of global warming and air pollution can be somewhat moderated and that these problems can be addressed through specific policy instruments directed at increasing the market for hybrid cars as well as extending lifetime of automobiles, which is contrary to the current wisdom.

Food-Miles and the Relative Climate Impacts of Food Choices in the United States Christopher L. Weber, H. Scott Matthews Environmental Science & Technology 2008 42 (10), 3508-351

Despite significant recent public concern and media attention to the environmental impacts of food, few studies in the United States have systematically compared the life-cycle greenhouse gas (GHG) emissions associated with food production against long-distance distribution, aka “food-miles.” We find that although food is transported long distances in general (1640 km delivery and 6760 km life-cycle supply chain on average) the GHG emissions associated with food are dominated by the production phase, contributing 83% of the average U.S. household’s 8.1 t CO2e/yr footprint for food consumption. Transportation as a whole represents only 11% of life-cycle GHG emissions, and final delivery from producer to retail contributes only 4%. Different food groups exhibit a large range in GHG-intensity; on average, red meat is around 150% more GHG-intensive than chicken or fish. Thus, we suggest that dietary shift can be a more effective means of lowering an average household’s food-related climate footprint than “buying local.” Shifting less than one day per week’s worth of calories from red meat and dairy products to chicken, fish, eggs, or a vegetable-based diet achieves more GHG reduction than buying all locally sourced food.

Obama’s new CAFE Standards as a tax break

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.

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

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

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.

Transit and energy

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

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

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…

Energy Disasters of the Future? Michael Klare

From the Nation:

On June 15, in their testimony before the House Energy and Commerce Committee, the chief executives of America’s leading oil companies argued that BP’s Deepwater Horizon disaster in the Gulf of Mexico was an aberration—something that would not have occurred with proper corporate oversight and will not happen again once proper safeguards are put in place. This is fallacious, if not an outright lie. The Deep Horizon explosion was the inevitable result of a relentless effort to extract oil from ever deeper and more hazardous locations. In fact, as long as the industry continues its relentless, reckless pursuit of “extreme energy”—oil, natural gas, coal and uranium obtained from geologically, environmentally and politically unsafe areas—more such calamities are destined to occur.

link: The Coming Era of Energy Disasters | The Nation

I’m not sure sure about the other scenarios, but the Nigeria scenario seems pretty unlikely at this point. There, oil companies have gotten the hint: after violence directed at oil workers by militant indigenous organizations, those companies pulled out and the NIgerian government has nationalized most production last year. I haven’t studied the other two situations, however, and they are worth thinking about.

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