Know-How Exchange : Other

Kevin,
I'm old enough to remember the panic when it went from 29cents to 63 cents per gallon in a very short time. When I got married it was $1.45 (1981) so yes, it is still inexpensive..relatively speaking.

That said, I don't see panic because the run-up has been very gradual. If it tripled in a year...might be trouble. My college roommate is a geophysicist for a smaller oil company and says that shale oil (remember that??) is a viable option once oil passes $30/barrel. And the obvious question.......

Personally, I think its a distribution problem. We haven't built a refinery in more than 20 years. When ANWR was initially proposed it was 10 years ago...exactly the amount of time it takes to build one. We could use the 1M barrels/day right now. I think there'll be a normal increase in MPG ratings but not because of gov't intervention. The number of people who telecommute keeps the impact of higher prices lower than it would have been in the early 70s.

I think anything below $1.00/gallon is acceptable. In Cook county (Chicago) gas taxes can exceed $.50/gallon. It's not the oil that's expensive. Also, Chicago require different gasoline blends that many areas that keep prices high. Hopefully, temporary lifting of those restrictions will become permanent.

Rambling....

Michael

This too shall pass. In a year or two we'll look back at the cost of energy in 2005 and think it was quite reasonable.

Meanwhile, it will probably spark a raft of energy "surcharge" add-ons and price increases in almost all manufactured/delivered goods. The Fed will probably slow the interest rate hikes (because inflation will be increased as a result of energy costs).

It's complicated, of course, by the entire recovery cost from the hurricane -- on top of the Iraq war ... er, war on terrorism -- and the rampant deficit spending embraced by the current administration. But that's not really new. It's been going on for decades.

And of course there are a few companies poised to benefit from the higher energy costs, so a few folks (and investors) will do just fine.

Interesting question to ponder.

I probably watch too much CNN, but one quote stuck in my mind from a story they ran last week on rising gas prices.

The comment made by a Dept. of Energy official: "Get used to it."

Hope you're able to walk to work, Kevin!  ;]

Shelley

You Americans and your obsession with CHEAP gas. Get over it!! You got yourselves in the problem with your obsession with gas guzzling hummers and SUV's.

In New Zealand we pay 3 times what you pay for gas.

In the last 3 months gas has rising 40% and the government has put a new 5c per litre tax on to help pay for the road works in Auckland.

BUT humans always come up with a new technology that will replace one that is staring to run out.

For example when silver started to run out, people found away to extract the silver used in the photo developing process and reuse it, then not long after came digital cameras.

For instance did you know that there is a process to converts used plastic BACK in to crude oil, yup it ture but it is very expensive.

And for part 3, i was not alive then. I was just a twinkle in my dads eye :P.

Kevin,

1) How do you think they will effect the economy considering we currently have a strong economy that is growing but very heavily dependent on cheap distriubution and cheap energy?

A: One scenario I see is that while American consumers have shrugged off gas prices hovering around $2.60-$2.75 per gallon, if prices stay above $3.00 for an extended period of time, or even move toward $4.00, there could be big changes. The $3.00 plus threshold being crossed is as much a psychological threat as it is economic and most likely will effect overall spending.

On top of this is that it could spawn real shortages and topping off/hoarding which could make gas unavailable at any price.

Then people can't get to work and goods can't get delivered and we have a real big problem,

2) What do you understand the problem to be and how will the market correct this problem?

A: Well, no doubt Katrina has hurt a lot, and could continue to effect into the future because production capabilties have been compromised.

Everybody in the supply chain - refiners, wholesalers, retailers and consumers fear a supply squeeze and the old law of supply and demand is kicking in.

Price gouging is not helping either - is it happening? Of course it is.

Not sure the problem is going to be corrected. We might just have to get used to it. Let's see if we get a cold winter, how quickly they recover from Katrina, if hoarding continues......

3) When you compare the prices today with the gas crisis of the late 70's early 80's, the prices are not as high as then. When do you see gas prices declining back to reasonable levels and what is your estimation of reasonable prices for gas?

A: Again, not sure they will. Maybe slightly below $3.00, but I think the days of less than $2.00 are over, and to me, this is a price level that is reasonable (the latter).

Of course that depends on if I am driving my economical sedan or my gas-guzzling 4WD pickup truck. 30 MPG at $3.00 hurts a lot less than 12 MPG at $3.00.

Hi Kevin

A UK view is that even with the Government wasting (taking) 70% of every £ spent on petrol in tax at the pumps, on top of it’s taxes on the manufacturers and taxes on our production in the North Sea, petrol is still less expensive than it was 25 years ago when adjusted for inflation. On the other hand, beer prices are about 50% more expensive, again, most of which is attributed to Government waste.

Energy costs as a whole are having a significant impact on UK businesses because our “Partners” in the EC largely enjoy the benefits of lower fuel costs, lower electricity prices and lower gas costs through lower utility taxation (We pipe gas and burn it in boilers and cookers in the UK – what on earth do you use in the USA and if it’s also called Gas, how do you stop the average American from trying to fill his oven up with gallons of unleaded and then calling the lawyers when he blows the house up?!) Hence, the energy intensive industries such as Steel, Glass, Ceramics, and Aluminium etc are all suffering. I can’t see this going away but it’s not symptomatic of high worldwide energy prices.

Even domestic haulage suffers as a Spanish lorry driver can fill up his tank on the continent, do a delivery in Britain, do an additional local drop and then head back home with a new load, all on the one tank of Belgian or French diesel.

Where these costs have had little impact to date is the food sector and our retailing environment, where we glibly purchase all our vegetables from the other side of the world whilst ignoring the tastier ones grown next door to the supermarket by local farmers, because their ERP system and supply logistics do not allow small local suppliers to enter the chain.

Maybe increased costs in aviation fuel would put an end to this, but better marketing by farmers and local producers and the effects of farmers markets are already showing promising results.

The long term effect of all this rather depends on the extent to which Government gets involved. When they do too much, the distortions in the market usually negate whatever they were trying to achieve, but at a huge cost to the tax payer. If they are sensible enough to display a light touch, the market will largely correct itself.

Innovation will out and if allowed to do so, will show us the way forward. If our petrol prices are actually lower than in 1980 when adjusted for inflation, the cost per mile must have dropped like a brick when you consider the improvements in miles per gallon, cost of vehicle purchase and other running costs.

In addition, our clever technologies are freeing up the admin burdens in small to large enterprises by automating the drudgery. I’d like to think that enlightened companies would re-deploy people to do something productive rather than write reports that my CRM system has just made redundant, but it doesn’t always happen that way.

Over here, the Government mops them up as Gender Awareness Advisors or Environmental Sustainability Initiative Officers. Well, they have to spend the taxes on something, don’t they?

Steve Alker
Unimax Solutions

Kevin

Actually, that is demand, as defined by a traded commodity on a market. The market is not quite free, but it’s as near as it gets in this world. Gas, petrol, crude etc. are all traded on an open market and the price struck for any given deal is what the traders are prepared to pay, given their knowledge of the supply situation.

If 10% of US crude production is temporarily shut down, that’s no great shakes in a market with a lot of liquidity (Money to buy and stocks to purchase) but if the market is illiquid, even for a short time on the stock front, the traders will drive the price up – after all, no one wants to be caught out without fuel, even if it’s expensive.

The lemming like behaviour of car owners in a crisis such as this drives up prices even more. Petrol is a refined product and therefore needs to be created from crude – it does not come out of a tap from source. So if every driver in the US decides to fill up their tank, “Just in case”, that’s the forecourts emptied. The demand is such, that it also empties the tank-farms which supply your “Gas” stations. They are usually re-filled from the refineries, which keep only a small amount of refined product on site – they don’t want to expose themselves to price fluctuations or become involved in the cost of storage.

That brings us back to the traders. If they have anticipated the behaviour of car drivers by purchasing next weeks output from the 90% of refineries still operating, then what price do you think they are going to sell their fuel for? Right, it’s going to be higher. We now have demand, a shortage and dealer profit driving price.

I wouldn’t complain too much about it though. We benefit from the dealers activities when the price falls (Supply exceeds demand) and without their money in the market, the price at the pumps would jump around like a seismograph in an earthquake. You’d end up filling up at $11.21 in the morning only to find, that had you been able to hold on to the evening, you would only have needed to pay $2.34 or something. That’s what the price on the spot market does, where oil companies, traders, utilities and governments buy and sell their fuel when they don’t have enough for the next half hour. Or have too much and want to get rid of it – for a price. Recent crude spikes have been as high as $112 / barrel and I understand that petrol has hit $6 / gallon for the odd minute or so.

There’s a longer game as well, in hedging the price. The airlines in particular will have offset their fuel price rises this year by purchasing aviation spirit futures at a lower price than they have to pay now. This is not a one way street. If they guess the market wrongly, they will be sitting on a sizeable loss. Think on that when you next have to pay the £60 transatlantic surcharge British Airways slapped on to its flights today. It’s all profit to them, to offset the losses they’ll make next year! (Not quite, but it sounds better put that simplistically)

By purchasing fuel production that hasn’t even been refined yet, traders help to stabilise the market. In times of anticipated shortage, it also further drives up price. If they have guessed correctly, they also make a profit on it. If the Saudis open up a few hundred million barrels of spare capacity, then they lose their shirts.

So I don’t think that there’s something else at work here, short of the actions of primary markets and the effects of the enormously complex financial instruments which have been devised to allow the banks and commodity traders to hedge their bets - derivatives. You need a PhD in maths to be able to read those – never mind understand what they do.

Lastly, don’t take the jibes about your whacking great 4X4’s to heart. Our Bentley’s, Aston Martin’s and Jag’s aren’t much better and they all account for only about 0.5% of all transport fuel consumption. It’s probably bicycle driven green tinted stuff that’s coming out there.

No connection to any contributors: Isn’t it funny that the colour of the classical god of envy is the same as the save-the-world-by-recycling-your-toilet-paper lot?

Steve Alker
Unimax Solutions