GAS PRICES, BROCCOLI AND DOUGHNUTSECNS 594Montana Council on Economic EducationJune 20, 2013
Our lesson today….
• Energy industry in Montana
• Energy security = energy independence?
• Gas prices• Broccoli and
doughnuts
Why only 2 percent?
Teens and the price of a gallon of gas
How many drive to school?
How many drive as a pastime?
How many care about fuel efficiency?
How many ride the bus or ride a bike?
How many drive in a fuel conserving manner?
How many could tell you the price of a gallon of gas?
Wheels & Women…a teachable moment?
• How are oil prices determined?
• Drill baby drill?• Price asymmetry?• SUV sales?
elasticity social costs real versus nominal
Supply and demand
Efficiency and equity
Lots of teachable economic topics…
The downside of rising oil prices
The upside of rising oil prices
The oil price see-saw
Oil prices? What, me worry?
Consumers
Taxpayers
Producers
Society
Energy is Everywhere
Montana’s Energy Industries
Drilling Oil and Gas WellsNAICS 213112009 Employment = 333Number of firms = 49
Support Activities for Oil and GasNAICS 2131122009 Employment = 1,256Number of firms = 159
Petroleum RefiningNAICS 324112009 Employment = 1,069Number of firms = 5
Coal Mining NAICS 21212009 Employment = 946Number of firms = 7
Colstrip SteamElectrical Station2009 Employment = 578Number of firms = 1
Energy security = interdependence, not independence
“proven” reserves
Add recoverable and unconventional…
The Canadian tar sands
The marginal barrel of oil sold
• Does not matter where or by whom
• There is no use thinking nationalistically
OPEC as a united marginal producer
The world price is the price that matters
Drill baby drill
Foreign oil
World market
What’s the backbone of what we pay at the pump?
up from the ground come a bubblin’ crude…
Refiner Acquisition Cost of Crude OilPADD Region 4
(dollars per barrel)
Acquisition Type
Sep-2010 Oct-2010 Nov-2010 Dec-2010 Jan-2011 Feb-2011
Composite 67.50 69.89 76.05 80.64 82.50 77.97
Domestic 69.77 74.84 78.06 82.74 84.71 81.62
Imported 64.79 63.10 73.59 77.88 78.93 73.15
Movement of oil by pipeline between PADD Districts
PADD District Annual-Thousand barrels 2010
From PADD 1 to PADD 4 0
From PADD 2 to PADD 4 44,604
From PADD 3 to PADD 4 9,906
From PADD 5 to PADD 4 0
Total Oil From Other PADD Regions 54,510
From PADD 4 to PADD 2 122,722
From PADD 4 to PADD 3 70,895
From PADD 4 to PADD 5 11,548
Total Oil To Other PADD Regions 205,165
PADD 4 Exports +150,655
Wholesale traded in open market
Imports make up the difference
But how about wind, Montana has lots of it?
NERC Regions
Low expectations for wind energy
Retail gas purchases determined by…
• Supply arrangements and ownership structure– Oil company owned and operated (<2%)– Refining company owned and operated (<3%)– Branded independent (45%)– Unbranded independent (51%)
• Competition for consumers– Traffic patterns (one third will go out of their way
to save just 3 cents per gallon)
Other regional influences…
• Taxes• Location to refineries (jobbers buy at rack)• Fuel blend requirements• Rent (usually not downtown)• Replacement cost pricing (average retailers
take several deliveries per week)• Brand (market support, discounts, “market
inversion”
The world consumes 80 million barrels of oil per day…….
• World events determine world prices which determine local prices
• Political unrest• Growth in Asia• OPEC• Hurricanes• Refineries (conversion to ethanol additive)
How elastic is supply and demand?
Gas price asymmetry float like a butterfly sting like a bee
Are oil markets efficient?
Oligopoly Power
OPEC
External Costs
Nationalized Oil
Now for the broccoli and doughnuts…
U.S. encourages consumption!
So how do we get more Americans to eat broccoli?
Is $4.00 per gallon the tipping point?
Consumer behavior
• Nominal v. real prices
• Gas complementary good to autos
• Price elasticity of demand
Early attempt to encourage broccoli consumption
D2D0
D1
Quantity/Time
Price/UnitSmall Car Market
D0D1
D2
Quantity/Time
Price/UnitLarge Car Market
Do high gas prices sell small cars?Sales = βo + β1 (Fuel Price) + ε
Model Coefficient on β1 Adjusted R-Squared
Chevy Aveo +17.902 0.321***
Honda Civic +105.660 0.425***
Toyota Yaris +25.808 0.448***
Toyota Prius Hybrid +51.217 0.392***
Cadillac CTS +10.298 0.200**
Ford Expedition -7.663 0.44
Toyota Sequoia +4.772 0.102
Chevy Colorado -7.025 0.050
Toyota Tundra +48.143 0.257***
Why hybrids are difficult to sell
Discount Factor (3%) 1 1.03 1.0609 1.092727 1.12550881 1.15927407 1.1940523 1.22987387
Year 1 2 3 4 5 6 7 8
Gas Price ($3.00 *1.05) 3 3.15 3.3075 3.472875 3.64651875 3.82884469 4.02028692 4.22130127
Gas Cost 1200 1260 1323 1389.15 1458.6075 1531.53788 1608.11477 1688.52051
PV of Gas Cost Reg Car 1200 1223.30097 1247.05439 1271.26904 1295.95387 1321.11802 1346.7708 1372.92169
Total PV of Gas, Reg Car 10278.3888
Fuel Cost, Hybrid 360 378 396.9 416.745 437.58225 459.461363 482.434431 506.556152
PV of Fuel Cost, Hybrid 360 366.990291 374.116316 381.380711 388.786162 396.335407 404.031241 411.876507
Total PV of Fuel, Hybrid 3083.51664
Value of Time Savings 250 242.718447 235.648977 228.785415 222.121762 215.652196 209.371064 203.272878
Total PV of Time Savings 1807.57074
Annual Mileage 12,000MPG Chevy Volt=100MPG Chevy Cruze=30
Value of Time $50 per hour Gas Station Time Savings =300 minutes Per year
Total PV of Gas Savings 7194.87215
Total PV of Time Savings 1807.57074
Total Savings 9002.44289
Only two ways to fund highways
taxpayers
highway users
2 criteria for judging policy
efficiency• Users pay marginal social costs
of highway use
equity• Poor versus rich, rural versus
urban
Subsidize marginal social benefits• education• worker retraining programs
Tax marginal social costs• pollution• Liquor and tobacco
Social costs per gallon resulting from fuel consumption
Rural Passenger Vehicles
Urban Passenger Vehicles
Rural Trucks Urban Trucks0
10
20
30
40
50
60
70
80
90
External Costs per Gallon Fuel Consumed(2009 cents)
Social costs per mile traveled
Pavement Damage
Congestion
Accidents
Noise
Air Pollu
tion$0$5
$10$15$20$25$30$35$40$45
Rural Passenger VehiclesUrban Passenger VehiclesRural TrucksUrban Trucks
Designing Policy:doughnuts to broccoli
• External costs are related to fuel use AND miles driven
• How can we change behavior, without sacrificing equity?
Passenger vehicles account for over 90% of total miles driven
Urban Passenger Vehicles
63%
Rural Passenger Vehicles
29%
Rural Trucks4%
Urban Trucks4%
Share of Vehicle Miles Traveled, 2008
Passenger vehicles also account for over 75% of fuel consumed…
Urban Passenger Vehicles57%Rural Passenger Vehicles
21%
Urban Trucks12%
Rural Trucks10%
Share of Fuel Consumed, 2008
Fuel tax Vehicle miles
traveled taxIncome tax
3 approaches to change behavior
Equity• User pays• Burden on poor and rural• Increases costs of goods
Efficiency• Low administration costs• Incentive to curtail use
Fuel Tax
Equity• User pays• Burden on poor and rural
Efficiency• Incentive to reduce use• Administrative costs
Vehicle Miles Traveled (VMT) tax
Equity• All pay, not just highway users• Avoids burden on poor and rural
Efficiency• No incentive to reduce driving• Administration costs negligible
Income tax
$1 Trillion in profits and still at the trough?
$952 billion “Don’t need 100 year old subsidies to sell $100 per barrel oil”
$36.5 billion in subsidies
Subsidies and the price of gas
Unrest in Middle
East
Weak Dollar
Global Growth
Japanese Energy Supply
Oil companies inherit oil prices more than drive them
Even monetary policy
Resources for teachers
• Historical look at oil company subsidies– www.crs.gov
• Short term energy outlook:– www.eia.gov/emeu/steo/pub/contents.html
• Annual energy outlook:– www.eia.gov/oiaf/aeo/index.html
• International energy outlook:– www.eia.gov/oiaf/ieo/index.html
• Monthly energy review:– www.eia.gov/emeu/mer/contents.html
Questions?