Oil Refinery at Dawn
Oil Refinery at Dawn photo by flickr user Iguanasan

About half the time,  I read about a politician investigating high gas prices I roll my eyes, the other half the time I cringe. I understand why they do it: it’s a meaningless activity that could please voters (hence the eye-roll) because the majority of people have no idea what causes gas prices to be what they are (hence the cringing). I’m going to try to explain high gas prices, record profits for oil companies and why, if anything, gas prices are artificially low. Plus, what this all means for transportation policy.

Gas prices
Gas Prices, Anika Malone

One of the most common misconceptions about rising gas prices is that because an oil company makes record profits, this means they are gouging customers. This represents a fundamental misunderstanding of the basic rules of economics: price is equal to marginal cost. Oil companies make a lot of money each time oil becomes more difficult to find because the they can sell all their current oil at the price of finding a new barrel of oil.

Some oil is very cheap to extract (picture Beverly Hillbillies and the gun shot that made Jed Clampett rich), some oil is sort of hard to extract (shallow-water off-shore drilling), some is a massive production to extract (Alberta Tar Sands) and some more is incredibly difficult to extract (deep-water drilling such as the Deep-Water Horizon rig that exploded last year). It might cost nearly nothing to extract the cheapest barrel of oil, but more or less all of that has been or is being extracted. It is very expensive to find and extract a new barrel of oil because of where new oil discoveries are (deep under the ocean, etc.), and because at some point – likely very soon – we’re going to hit peak oil. This causes all oil to become priced higher, because oil companies need to ensure each barrel of oil is profitable.

A common rejoinder to this argument is that oil is next being sold in a free market, it’s instead being controlled by a powerful international cartel named OPEC. What’s interesting about OPEC, is their motivation is to protect oil producing nations whose only special skill in energy production is that they land beneath their feet is full of oil. These nations’ primary objective is to ensure they can make money on oil for a very long time, which means they want profitable oil and no alternative to be found. This is why you read things like Prince Alwaleed of Saudi Arabia saying the ideal price for them is oil in the $70-$80 a barrel range, and Saudi Arabia increasing production to stabilize prices. If anything, OPEC is over-producing oil to keep prices low and stable so alternatives aren’t found.

What does this mean for transportation? Well, two things. First, alternative energy is going to be needed one way or another because we’re actually burning through oil supply faster than a free market would let us. At some point, the artificially low prices won’t be sustainable and prices are going to skyrocket. This means both alternative power sources, and alternative transportation modes. Secondly, we’re in huge trouble if our transportation investments continue to be tied to oil consumption. At both the state and the federal level, most of our money for transportation comes from per-gallon gasoline taxes. We’ve already seen a drop in gas tax revenues as people have finally begun to drive less, and we’re going to see a further fall as gas prices rise even more, and that will mean even less money for investment.

68 Replies to “Market Forces and Gas Prices”

  1. This is interesting, and true as far as it goes, but incomplete Not a lot of what you mentioned has to do with the current price per barrel of crude. Oil prices are being controlled by the same speculative forces that ran crude up to over $140/barrel in 2008. OPEC does set a price, and they try to control production levels, but there is a lot of cheating and there are many producers not in OPEC. Many assume that OPEC will collapse in the next few years. Additionally, oil is priced at Brent Crude levels (deep sea, expensive). The more realistic price of oil is based on West Texas Intermediate (land based and cheaper to extract). Currently, WTI is $14 bbl cheaper than Brent. So, briefly, oil speculators buy cheap and sell dear.

    Oil prices fell almost 5% last week because the International Energy Agency released a minuscule amount of oil from reserves, which caused speculators to have to cover their spreads.

    We are currently awash in oil. Many storage facilities are full. In fact the major facilities in Oklahoma are so full that little oil can be moved and that in itself is causing a bottleneck. This will change when the world economy improves, but at least for now, supply and demand is largely irrelevant to the price of oil.

    Speculation in oil can be curtailed using the same method that broke the back of silver prices a few weeks ago–raise the margin requirements of oil. If speculators must put up 50% of the money in advance, crude prices will stay at around $80-$85/barrel until supply and demand does actually come into play again.

    OK, my explanation leaves out a lot, too. Didn’t even discuss refinery issues

    1. Or heavy/light crudes, sulfur content, generally lower prices garnered for Saudi heavy crudes, diesel vs. gasoline refining, or shipping issues… In short, it’s bloody complicated.

      Andrew is right – Little ever comes of these which hunts. I find Maria Cantwell particularly shrill on this issue. Frankly, I’d prefer we stop demonizing the publicly traded oil companies. Hold them to environmental standards, push for cleaner fuels, and push for financial reforms that keep oil contract trading in the hands of those who actually use oil.

      The real issue is that most of the oil in the world is controlled by State oil companies outside of our direct control. Despite this, we still act as though we are the world’s oil superpower that we were during WWII. It’s kind of pathetic, actually.

    2. I think we should just nationalize the entire energy industry, reconfigure it to be based on green fuels, let some time pass to allow the new culture to set, and then 20 years or so from now we can kick around whether or not to re-privatize it.

      From global warming to Enron-style price manipulation, the industry is failing us across the board.

    3. Remember, though, that after oil reached $140, it plunged to under $40. Those “speculators” who bought at $140 lost a lot of money.

      Remember that for every buyer, there is a willing seller. Not every investor in oil futures has a net long position. If I think oil is grossly overpriced, I would want to short oil futures (as a “speculator”), but the higher margin requirements would discourage me from doing so.

      1. ETFs trading on the market: the U.S. Oil Fund ETF (NYSE: USO), the PowerShares DB Oil Fund ETF (NYSE: DBO)

  2. Daimler CEO: Hydrogen-Powered Mercedes Coming Sooner Than Later

    The Mercedes-Benz boss predicts that a mass-produced version of the hydrogen-powered F-Cell car should be ready by 2014, one year sooner than originally predicted.

    During the past couple years, Mercedes has been intensely testing its F-Cell hydrogen fuel-cell car, which is based on the B-Class subcompact. As a test and display of the technology’s viability in the real world, Mercedes recently e a trip around the globe using three B-Class F-Cells.

    The vehicles completed the 18,641 journey, solidifying its case that the technology is indeed ready for mass production much sooner than later.


    1. Where will the hydrogen come from? If natural gas, how soon would it cut into our currently-abundant natural gas supply? What are the environmental impacts of extracting shale gas? I’m not sure how similar it is to extracting shale oil, but it takes a lot of energy and leaves behind a lot of environmental waste.

      1. Researchers Develop Artificial Leaf; Your Marigolds Cower in Fear

        A research team from the Massachusetts Institute of Technology (MIT) led by Dr. Daniel Nocera, Ph.D., claims to have made a drastic discovery in the world of sustainable energy by developing the first “practical” artificial leaf. These leaves are actually advanced solar cells that mimic photosynthesis, the process by which their real-life counterparts convert sunlight and water into energy. According Nocera, the leaves, although small in size, “”could produce enough electricity to supply a house in a developing country with electricity for a day.”


      2. Hydrogen can be cracked from water. Leaves oxygen as a by product, but it currently takes about the same amount of energy to extract H as you get out Fuel cells work too, but expensive and they still need some aort of fuel to make hydrogen Sources indicate there is a 200 year supply of Natural Gas in USA at current levels of use. If every long haul truck converted then supplies would last ~60 years. Time enough to find better sources. Converting trucks to NG would eliminate all middle east imported oil. Still need oil from Canada and Mexico.

        All fuel sources have environmental impacts. Example–NW uses hydro. No carbon, no storage of waste. Massive environmental damage occured when the dams were built that flodded millions of acres of land. Pick your poison.

      3. Residential Fuel Cells – Natural Gas

        I can see these catching on. As one comment pointed out they can be used in place of a back-up generator which is a sunk cost a lot of people have already decided is worth the investment (10 days in the middle of a winter snow storm has that effect on you). It can be a source of heat and electricity in the winter and works well with a heat pump system since they require a back-up/supplementary head source anyway (usually a gas furnace if NG is available). NG has the huge advantage of being piped directly to the home making transport costs minimal and disruption of supply rare. And we could produce large amounts of it as a renewable resource.

      4. @JayH:

        You’re ignoring all the latest research on catalysts that are reducing the amount of energy it takes to separate H2 and 0 in water. For example, here’s a company that is ready to go to market with a cell that uses 1/3 of the normal energy for hydrolysis!

        As Bernie is saying, we’re getting to point where these panels will be on the shelf at home depot. Want to generate energy and fuel for your car? Set up a few in the backyard. They even work on cloudy days (ultraviolet)!

        The company’s product, called the Solar Hydrogen Generator 300, is slightly bigger than a typical solar photovoltaic panel, measuring two meters wide and one meter high. Like a traditional electrolyzer, it applies a voltage to a liquid electrolyte to break apart the hydrogen and oxygen atoms in water. The hydrogen is stored in tanks and used in a fuel cell to make electricity.

        What’s different is that Nanoptek’s device can produce hydrogen from water using about one-third the electricity of a typical electrolyzer, said CEO John Guerra. The key is a titanium dioxide coating that is activated by both ultraviolet and visible blue light, he explained.


      5. As Bernie is saying, we’re getting to point where these panels will be on the shelf at home depot.

        I don’t recall saying that. A NG fuel cell that’s stationary is fundamentally different than creating hydrogen as an intermediate energy storage medium and then using that to create electricity later. A catylst lowers the reaction threshold. It can’t reverse the laws of physics which say that the molucular energy required to break the H2O bond can never be fully recovered. For mobile applications like cars batteries will always win. For long haul an onboard generator, like a NG turbine will out perform a fuel cell both in cost and efficiency. The only advantage hydrogen has over batteries is quick refueling and it’s no faster than LNG.

    2. The Daimler boys among others have been running a hydrogen show since the nineties. They have been claiming it’s ready for mass production in just a few years ever since. But some simple question remains: quanta costa? What’s the longevity of the fuel cells? Turns out the fuel cell alone costs as much as a premium car. The question of cost (catalyst) and life span may be addressed in the decades ahead. But the final question that shoots down every realistic notion of a hydrogen economy is: where do you get the hydrogen? Because of the energy cost of manufacturing hydrogen, the losses incurred while distributing and compressing it into tanks it is next to impossible it will scale to the needed level.

      There probably will be thousands, tens of thousands or hundreds of thousands of them. But dozens or hundreds millions? Impossible. It’s a question of energy NOT technology.

      1. Recent articles on Benz-BMW and KIA’s fuel cell cars efforts answer the cost argument. Mass production is just that…initially they might be around the cost of high end SUVs but will then drop. No longer do we have to use precious metals for catalysts as new, cheaper compounds can replace them. Overall design requires far fewer parts and fewer moving parts.

    3. Hydrogen is a dopey, stupid fuel.

      Direct electromagnetic energy storage is getting better and better and is the way of the future. I know people involved in the development of a magnetic battery which will substantially improve electrical energy storage. They’re not the only ones.

      The artificial leaf will be useful if it can be adapted to *carbon sequestration*. If it can artificially pull *carbon dioxide* out of the air, we’re gonna need them.

  3. oil is next not being sold in a free market

    Sure it is. OPEC does have an interest in maximizing long term profit but that is exactly what any industry does. Low prices to induce demand doesn’t mean it’s not a free market; look at the airlines since deregulation. OPEC (mostly Saudi Arabia, OPEC is really pretty fractured) has a history of turning off the spigot at times too. Widely fluctuating crude prices stifle economic production so it could be argued that OPEC is good for the major industrialized economies.

    oil producing nations whose only special skill in energy production is that they the land beneath their feet is full of oil.

    Well, it’s not like they really care about any of the other countries. In fact member nations have been in bloody wars with each other. They are all in it for their own good and often blatantly ignore their agreed to quota. If it weren’t for the Saudis being able to control the market over the short term on it’s own the cartel would fall apart.

    1. I’ve posted this before, but it bears repeating here:

      “THE Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.” – Sheikh Zaki Yamani – Former Saudi Oil Minister

      The Saudis, as Mike has pointed out, have no interest in killing their golden goose. The end of the Oil Age, also from The Economist, sums it up well:

      According to one American government estimate, OPEC has managed to transfer a staggering $7 trillion in wealth from American consumers to producers over the past three decades by keeping the oil price above its true market-clearing level.

      and, going further:

      That estimate does not include all manner of subsidies doled out to the fossil-fuel industry, ranging from cheap access to oil on government land to the ongoing American military presence in the Middle East.

      That number is surely higher now as the article is almost 8 year old now.

  4. “OPEC is split into two camps, those with spare capacity (of which Saudi Arabia controls 70%), and those who cannot pump any more oil. The first camp worries that the lofty bill for a barrel of oil is damagintg the world economy and a further price spike could destroy demand. Countries in the second camp, such as Iran, are happy with the high price and do not want more oil to get onto the market.” — The Economist, “Drill Will”, 2011-06-11, page 77

  5. Looking long term, you have to understand that it cost energy to extract energy producing supplies. If you graph out the lost energy of extraction/refining/transport/distribution then were about at the tipping point. 1920’s oil lost about 10% of its Btu content in the process. Future resources will approach 75% or more. Just look at ethanol or tar sands. It’s a loosing game.
    The easy oil is mostly gone, now we’re spending five bucks to sell ten bucks worth of gas.
    There are some bright spots on the horizon, but even those are temporary, such as feeding algae with coal slurry in the desert in huge bio-farms making up to 6,000 gallons of diesel per acre per year (another good reason to not sell our powder river basin coal to the Chinese at bargain basement prices)

    1. Speaking of short term, carbon excursions are always interesting in the Geologic record. Remember that time when there was the equivalent of one or more supervolcanoes erupting each and every year? Crazy, right?

  6. Tconsumption side is the bigger story, in my opinion: in the U.S., at least, we have been weaning ourselves off of oil slowly for a couple of decades.

    I’m not going to look this up, but from memory, about 20 years ago the U.S. generated about 20% of its electricity from oil. That is now just about zero — we get all our electricity from coal, natural gas, hydro, wind, et. al., but zero from oil.

    About 20 yaers ago around 20% of all U.S. homes were heated with oil. That is now down to about 10%, as many homes have converted to natural gas and electric heat. Only 2% of new homes are being built with furnaces that burn heating oil, so the overall percentage of homes that burn heating oil will continue to drop.

    So transportation is the main area where consumers now use a of oil in the U.S. And guess what? That is beginning to change as, this year, for the first time, there are fairly practical electric cars available to the public, and thousands of charging stations are being built. I think the numbers are only about 50,000 electric cars expected to be sold in the U.S. this year, then maybe 100,000 next year, but within 5 years there might be one million sold. That will continue to increase as the number of charging stations grows quickly and as battery technology improves and prices come down.

    The mpg of gasoline cars sold in the U.S. is going to increase very quickly in the next few years. Within 5 years, it is expected sedans will get 40 mpg and compacts 50 mpg. Some new cars get that sort of mileage right now, particularly hybrids. But most regular gasoline cars will get that type of mileage by 2016. The average car in the U.S. is about 10 years old, so the U.S. auto fleet mostly turns over in 20 years. So, the mpg of the average U.S. car will increase slowly, but surely over the next 2-3 decades.

    As someone else wrote, trucks, buses, and other vehicle “fleets” can, and will, convert to run on natural gas. Pretty much any gasoline vehicle can be converted to operated on natural gas. IF the price of gasoline is high enough for long enough there will be large numbers of autos converted to natural gas. There are decaes worth of natural gas in the U.S. We don’t need to import natural gas.

    In short, the price of oil is becoming less and less important in the U.S. In ten years, if you are driving an electric car, or a gas car getting 50 mpg, you won’t care so much what the price of gasoline is. And not that many people will be burning heating oil in their homes.

    At the same time, there is a lot of oil being discovered and produced all the time.

    It is easy to foresee a future of inexpensive energy in both the short and long runs.

    1. Interesting point about the switch from oil heat. Our home was built in 1961 and we didn’t get around to replacing the old oil burner until a couple of years ago. Our cost per month for heating was about $350/mo averaged over the full year (payment plan). With a high efficiency air to air heat pump our cost for heating and cooling is about $30/mo for electricity and the small amount of NG used when the temperature drops to below 20F. What’s happened to all the refinery capacity that used to be producing heating oil? When cars like the diesel Rabbit became popular in the US the price of diesel for the first time became more expensive than gas. Now, with relatively few diesel cars being sold, more freight being moved by rail (yes it uses diesel but is more efficient than trucks) and a steadily declining market for home heating oil how come diesel is more expensive than gas just about year round? Yes, some is due to higher fuel taxes on diesel, which is silly but most of it is because of refinery capacity which makes me believe the oil companies can make more money on gasoline than diesel even though they can get more gallons of diesel from a barrel of crude than gasoline and it takes less energy to produce.

      1. European refineries produce a surplus of gasoline since they have incentives for diesel use. The surplus is typically shipped to the US and moderates our gasoline prices somewhat. According to the EIA we are averaging about 1 million barrels of gasoline imports per day vs (I think) just over 9 million barrels produced.

        Heating oil and Diesel are very close in the refining process. Diesel is more consistent while Heating oil can be a combination of products that are slightly heavier or lighter than diesel.

    2. I was with you up until this point:

      At the same time, there is a lot of oil being discovered and produced all the time.

      It is easy to foresee a future of inexpensive energy in both the short and long runs.

      The oil we’re finding is harder to get at, more energy intensive to extract, and hardly “inexpensive”. At best, we’re treading water although I doubt that, given the large increase in demand from China and India.

      We are definitely getting more efficient though – high prices have a funny way of doing that :)

      As for Natural Gas Conversion: Metro looked at it in the 90s but ruled it out given the massive costs to upgrade their maintenance facilities to avoid explosions. (Natural gas floats in air while diesel doesn’t). I also recall reading something in that report about PSE not having enough pipeline capacity into the Seattle area to handle the peak fueling loads but I can’t find that original report. Anybody know more detail on the history?

      1. http://finance.yahoo.com/news/Oil-prices-fall-as-Libya-apf-7

        “The Saudis currently produce about 8.5 million barrels of oil a day and have the capacity to produce more than 12 million barrels a day.”


        “Jonathan Fahey, AP Energy Writer, On Thursday February 10, 2011, 12:40 am EST

        “A new drilling technique is opening up vast fields of previously out-of-reach oil in the western United States, helping reverse a two-decade decline in domestic production of crude.

        “Companies are investing billions of dollars to get at oil deposits scattered across North Dakota, Colorado, Texas and California. By 2015, oil executives and analysts say, the new fields could yield as much as 2 million barrels of oil a day — more than the entire Gulf of Mexico produces now.

        “This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers.”


        “Petrobras is set to rapidly increase in size in relation to Brazil’s economy as it prepares to double domestic oil production through the development of its recently discovered huge “pre-salt” fields, said Jose Sergio Gabrielli, chief executive.

        “The pre-salt fields will help double Brazil’s domestic production of oil from about 2m barrels per day presently to about 4m bpd by 2020, he estimated.”


        “February 03, 2011

        “Iraq oil production could be 25-35% higher than 2010 in 2011

        “International oil companies involved in Iraq’s oil opening are expected to add a further 300,000 b/d to production this year, hoisting the total to 3 million b/d

        “Going forward, Iraq hopes to produce around 12 mbpd in the next six to seven years, which may account for around a quarter of OPEC’s supplies.”

      2. http://finance.yahoo.com/banking-budgeting/article/112874/natural-gas-fuel-wsj?mod=bb-budgeting&sec=topStories&pos=6&asset=&ccode

        “Natural Gas Entering ‘Golden Age’
        by Guy Chazan
        Tuesday, June 7, 2011

        The Wall Street Journal

        “The global natural gas market is in the midst of a revolution that has huge implications for the future of energy. In the U.S., technological advances like hydraulic fracturing, or “fracking,”—in which water laced with chemicals is injected into the ground to crack open dense, gas-bearing shale rock—have fueled a surge in production from vast new gas reserves stretching from Texas to Pennsylvania. Such techniques are now being applied in other countries with big shale-gas resources, such as China. The IEA says that over the next 25 years, 40% of the growth in total gas production will come from unconventional gas.

        “The shale revolution has led to substantial upward revisions in estimates for total global reserves of gas. The IEA says there are enough gas resources to sustain current production levels for more than 250 years. And unlike oil, which is concentrated in the politically fragile Middle East, gas is widely dispersed geographically, making it attractive from an energy security perspective.

        “The rise of shale has coincided with a massive expansion of the global trade in liquefied natural gas or LNG, which has vastly increased the availability of a fuel that for decades could only be pumped via pipelines.”

      3. This graph by the IEA says more than a thousand words. There certainly is a lot of oil to be discovered and produced. But daily production and demand is paramount. Therefore it matters most how fast it will come onstream (given exploding E&P costs). This “a lot of oil” needs to be exploited fast just to fill the gap left by declining existing major oil fields. World oil production is currently losing the capacity of the entire North Sea in 15 month or the entire capacity of Iran in 11 month. It’s an enormous challenge to maintain current supply let alone grow it.

      4. Basically, the shale gas play is a big bubble set to maintain or increase slightly NG production in North America. They are utterly uneconomical under current prices except from a few central formation areas (shareholder equity is drained to artificially support low NG prices), they decline very fast (60%-80% in the first year) and therefore need massive drilling at unprecedented levels. See this:


        and this


        and finally this


      5. World proved oil reserves in 2010 were sufficient to meet 46.2 years of global production, down slightly from the 2009 R/P ratio because of a large increase in world production.

        BP Statistical Review of World Energy 2011

        We’re running faster to stay on the treadmill. This of course completely ignores CO2 emissions and the fact that worldwide energy demand is still growing.

      6. People have been warning about “peak oil” and falling oil production for years. Yet, daily oil production is at an all-time high, and just keeps increasing (other than during steep recessions, when demand falls).

        I will believe the news reports I have posted. There is a very large amount of oil and natural gas that will be coming online in the next five to ten years. I did not even include Canada, and their increasing production of oil, or, a new large oil discovery in the Gulf of Mexico.

        You can keep on being Chicken Littles and claiming “Oil is disappearing, Oil is disappearing.”

        But, so far there is no sign of worldwide oil production going anywhere but up. Natural gas, also. And there is always coal…….

      7. It’s a nice paradox isn’t it? Peak oil happens when oil production is largest and consequently when the optimism regarding ever-growing supply is biggest – as it was when the US peaked in 1970. BTW oil production has been flat +-4% for the past 6 years. Total’s CEO says it will optimistically never top 95 Mb/d. Petrobras’ CEO (the company who is supposedly going to save all our asses) said something to the same effect: http://www.theoildrum.com/node/6169
        The IEA says 96 Mb/d until 2035 iff the necessary expensive “investments are made in a timely manner”. Shell thinks conventional production will not grow after 2015.

        Personally, I see a medium-term increase of production to above 90 Mb/d. Either a supply crunch will set in starting around 2014 because demand starts exceeding supply due to growth. Or we will see another recession which will dampen demand. The real peak moment (when production starts declining) will happen in the second half of the decade or we are already in flat production territory with a steep decline in the next decade.

        Anyway, one doesn’t have to listen to pinko commie chickens. A well-respected money manager very convincingly lays out the case against infinite compound growth and ever increasing oil supply:

      8. You can believe peak oil or not, but the simple fact is fossil fuel supplies are finite and most of what can be extracted cheaply is gone. Add that to growing global demand, especially from China and India, and you have a recipe for expensive fossil energy in the future.

        Sure the supply isn’t going to disappear overnight but anyone who thinks we’re going to see the days of $8/barrel oil again is sadly deluded.

        One effect of more expensive energy is it makes alternatives more attractive which is not something those with a vested interest in fossil fuels want to see.

        Another issue is it makes incredibly dirty sources like tar sands or coal-to-liquids more attractive as well. Coal is incredibly dirty, far worse than even the worst scaremongering about nuclear. The problem is the world has lots of coal, especially the US and China. The temptation to crack it for liquid fuels is there as long as the price is right.

        In the long term the world needs to get used to higher energy prices and find ways to wean itself off fossil fuels. In addition to alternative sources of energy one of the best ways to prepare is to become much more efficient in how energy is used. This doesn’t mean adopting a third-world lifestyle, but it does mean some of the bad habits developed in the era of cheap energy will need to be broken.

        The real question is will there be a gradual transition to the future or will that transition be marked by energy price shocks, recession, and social unrest?

        Those who advocate making public policy adjustments now are supporting the former, those who take a Pollyanna approach to future energy supplies are supporting the latter.

      9. We have at least a couple decades of relatively cheap energy. But that time, this will be happening, so the price of oil really won’t matter much to drivers, just like the price of oil now does not matter to home owners who don’t heat with oil.


        “NEW YORK (Reuters) – The Obama administration is considering requiring all new cars and trucks sold in the United States to get an average of 56.2 miles per gallon by 2025, The Wall Street Journal reported on Sunday.

        “U.S. officials presented the possible new standard in a proposal to representatives of Detroit auto makers, the Journal reported in its online edition.

        “The newspaper said the proposal isn’t final and could be adjusted over the next several weeks before it is presented to White House budget officials.”

        If anything even close to this actually happens, it will be a real game-changer. Consider that even at an average of around 22 mpg, autos with the national average of 1.6 passsengers are more energy-efficient than the average light rail system. At about 45 mpg, they become much about twice as energy-efficient as light rail.

        They must be depending on a lot of electric cars in the U.S. fleets. Electric cars can get the equivalent of 200 mpg or more: “EPA ratings of the Volt and Leaf — 230 mpg and 367 mpg, respectively.”

        Anyone interested in energy efficiency in transportation should be promoting electric cars.

      10. http://finance.yahoo.com/news/Gushers-highlight-potential-apf-3807643486.html?x=0&sec=topStories&pos=3&asset=&ccode=

        This just in this afternoon:

        “Gushers highlight gas potential of Pa.’s Marcellus Shale; drillers boost production estimates”

        “ALLENTOWN, Pa. (AP) — Two unexpected gushers in northeastern Pennsylvania are helping to illustrate the enormous potential of the Marcellus Shale natural gas field.

        “Each of the Cabot Oil & Gas Corp. wells in Susquehanna County is capable of producing 30 million cubic feet per day — believed to be a record for the Marcellus and enough gas to supply nearly 1,000 homes for a year. The landowners attached to the wells, who leased the well access, numbering fewer than 25, are splitting hundreds of thousands of dollars in monthly royalties.

        “There was definitely excitement among the team that planned out these wells and executed their completion,” said Cabot spokesman George Stark.

        “Drilling companies knew the Marcellus held a lot of gas. They just had to figure out a way to get it out, and they say they’re getting better at it all the time.

        “The result is that the Marcellus, a rock formation beneath Pennsylvania, New York, West Virginia and Ohio, has turned out to be an even more prolific source of gas than anyone anticipated. Energy firms are boosting their production targets, not only because new wells are coming on line but also because they’re managing to coax more gas from each well.

        “Fort Worth, Texas-based Range has boosted its estimate of the amount of natural gas it will ultimately be able to harvest from its Marcellus Shale wells, telling investors this month that it plans to triple production to 600 million cubic feet per day by the end of 2012.

        “Another major player, Chesapeake Energy Corp., has likewise reported a dramatic increase in expected well production. Early on, the Oklahoma City-based driller predicted that each well would yield 3.5 billion cubic feet of gas over its life span. That amount has since doubled, to more than 7 billion cubic feet, and continues to go up.

        “The new Cabot wells help illustrate why boosters believe the gas field could help steer U.S. energy policy for decades to come.

        “Like other drillers, Cabot has steadily increased the horizontal length of its wells, from an average of 2,100 feet in 2008 to 3,600 feet last year. It has seen a corresponding increase in capacity.

        “The Marcellus isn’t the only shale formation in Pennsylvania that energy companies have their eye on. Drillers are just beginning to explore the gas-bearing Utica and Upper Devonian formations. The Utica is deeper that the Marcellus, and the Upper Devonian is shallower.

        “It’s triple the resource potential under the same plot of land,” said Kevin Cabla, an energy analyst at Raymond James & Associates.”

        Like I said, the amount of reserves just keeps growing almost by the day. They keep finding more and more and getting better and better at getting it out of the ground.

      11. There’s evidence from the US DOE geologists that man of the hydrofracking companies are “juicing” their projections in what is essentially a stock market pump-and-dump. I would not believe their projections.

      12. As usual, Norman, your wild claims that cars are more energy-efficient than electric rail are essentially wrong. You didn’t do lifecycle analysis.

        Electric cars will, however, be the transport of choice in rural, semi-rural, and less dense suburban areas. Rail thrives on volume.

    3. Thanks for a startlingly thoughtful comment.

      Improved solar panel tech and improved batteries are going to set us on a photovoltaic future.

  7. I’m not so sure that “price is equal to marginal cost”. Price is what the marketplace will pay. Hopefully, it exceeds your marginal cost and leaves room for profit.

    1. Price = MC is an economic reality. Like I said, not all items cost marginal cost (the Beverly Hillbillies oil was next to free) so you make money over all your oil.

  8. Absolutely none of this matters. The sun will (probably) evolve into a “red giant” and burn our lovely planet to a crisp, if that. Grab everything you can. Now.


  9. http://blog.nwautos.com/2011/05/new_technologies_are_poised_to_make_cars_more_fuel-efficient_than_ever.html

    Here is an article on U.S. autos becoming more energy-efficient very soon.

    “New technologies are poised to make cars more fuel-efficient than ever”

    “The first modern mass-market electric cars — the Chevrolet Volt and Nissan Leaf — are causing a sensation, especially as gas prices top $4 a gallon. However, a quiet revolution in engines and transmissions promises to save vast amounts of oil in the decades before electric vehicles rule the road.

    “Even electric vehicles’ ardent supporters concede that EVs will be only a tiny slice of the total vehicle fleet for years to come. But Chrysler, Ford, General Motors and Volkswagen are poised to deploy other fuel-saving systems in millions of vehicles. Some are already on the road. Many more will be within a year.

    “The technologies to watch for include turbocharging, direct gasoline injection, diesel engines, automatic transmissions with eight speeds or more, and dual-clutch transmissions.

    “Ram trucks will have fuel-saving eight-speed transmissions by 2013.

    “None of those gizmos provides the surreal EPA ratings of the Volt and Leaf — 230 mpg and 367 mpg, respectively –but they make a difference. And by 2015, you can reasonably expect that every new car and truck will feature some of these technologies.

    “The result will be fuel economy no one dreamt of as little as a decade ago, including midsize sedans that achieve better than 40 mpg and compacts that reach 50 mpg.”

    Note that all of these features are fairly basic technology. They are not dependent on any exotic, new, untested technologies.

    1. We’ve been seeing these kind of articles for a few decades now. I’ll believe it when I see it, and no, a hybrid getting 35mpg in the real world is not a big thing. When I can see a full-size car getting 75mpg and big ol’ Ford truck getting 50mpg, then there will be a difference in the amount of gasoline America uses for transportation.

      1. lol What a foolish comment.

        The average car in the U.S. gets around 22 mpg. By 2015 new cars will be getting about double that. It will take another 15 years or so, for the average U.S. auto to average 45 mpg or so, but that will happen.

        For the average U.S. (diesel or gas) car to use half the gasoline per mile it uses now is “not a big thing”? It is a huge thing.

        And all-electric cars use zero gasoline.

        By the way, Hummers went out of production in 2009.

      2. The way fuel economy is measured for regulatory compliance is on “fleet” averages. So, Chevrolet is building the Volt that will clock in at about 90+MPG, they will give incentives for sales of their small “Cruze” product (which they may be selling at a loss) that averages about 38 mpg. But all of their other products will only see marginal improvements. But the fleet average will get above the required mandates.

        As for those new investments in fields in Colorado etc? Those are shale or tar sand fields and they are much more expensive to extract. But with the average price per barrel of crude over $90/bbl, it’s become viable to explore those fields.

        Refineries are major endeavors to build and take about a decade for them to come online. (http://goo.gl/3dsVX) There hasn’t been a new one opened in the United States in well over 30 years. So, refinery capacity is an issue.

        You will see periodic dips in the price of oil but the general trend is only going to go up. We may be numb to $4/gal gas, but what about $7/gal? Norman’s pie in the sky optimism about oil is amusing.

        There are serious structural problems with the economics of oil going forward and our only way out is to 1) change our lifestyles (Dense urban living, conservation, less consumption) 2) Find a magic bullet for energy 3) Die off…

      3. U.S. refineries are operating at way below capacity. Refinery capacity is no issue at all.

        U.S. oil consumption is not expected to increase much, if at all, so why would we need more refinery capacity? Cars are getting much more fuel-efficient, and homes continue to convert away from oil heat. Natural gas is abundant and very cheap.

        Energy will be cheap for the next couple of decades, at least. After that, so much will be done over the internet, that energy cost will be far less important than it is today.

      4. As usual, Chris is right and Norman is wrong.

        However, Chris, there are magic bullets for energy coming. Watch the development of solar technology. :-)

      5. By saying that Norman is wrong, I mean wrong about the future prices of oil, gas, and coal, not about the future price of *energy*. At some point the price of solar energy starts undercutting everything else, and that happens very soon.

    2. We HAVE been hearing this forever. The average MPG numbers for American cars have gone up only 2.3 mpg in 18 years (20.3 in 1990 and 22.6 in 2008). The only reason it will ever change is if the government absolutely forces the issue or the price of oil goes up. The latter is clearly not happening for any length of time and the former is not going to happen if the GOP keeps pushing back. The CAFE standard has been the same since the Reagan administration set it in 1985 at 27.5 mpg. Obama wants to tighten things up but there’s been a lot of backlash.

      1. The U.S. government has recently raised the CAFE standard.


        “We knew it was coming. Today, the National Highway Traffic Safety Administration and the Environmental Protection Agency jointly released new Federal CAFE fuel mileage and greenhouse gas emissions requirements that will cover the 2012 through 2016 model years. The estimated fleet-wide fuel economy standard has been set at 34.1 miles per gallon by 2016, though improvements in air conditioning systems will bring that number up to around 35 mpg. That equals a standard of roughly 250 grams of carbon dioxide per mile.

        “The overall fleet fuel mileage requirement will be an average between both passenger cars and light trucks, and NHTSA is predicting that the 2012 numbers will be 33.3 for cars and 25.4 for trucks in 2012, rising to 37.8 for cars and 28.8 for trucks by 2016. As before, credits will be dished out for vehicles that can run on E85 (ethanol), though automakers will need to prove their cars are running on the alcohol fuel by 2015 to continue earning those credits.

        “Smaller volume automakers that sold fewer that 400,000 cars in 2009 will get a break on the requirements while “specialty automakers” such as BMW and Porsche will reportedly get longer lead-in times. Automakers will also get some sort of incentive for the first 200,000 plug-in hybrids and electric vehicles built by 2016. These standards are said to be equivalent to taking 58 million cars off our nation’s roads for a year, representing a savings of 1.8 billion barrels of oil.

        “Naturally, all of this is going to cost some extra dough. If the Feds are right, automakers will spend $51.5 billion over the next five years putting the standards into effect and the average price of a new car will rise by $985 by 2016. Savings, though, are expected to be even greater, with the average consumer will net an extra $3,000 in their wallets per in fuel savings over the life of the vehicle.”

        Notice that the new standards include SUV’s (light trucks).

        Moreover, people are starting to buy more small, fuel-efficient cars, and stop buying big, inefficient cars. As I wrote the Hummer went out of production in 2009, because nobody was buying them.

        For decades the GOP refused to mandate greater fuel efficiency in autos. This has changed. Almost everyone is on board now.

        Was any company selling electric cars in any sort of volume in the U.S. in 1990, or even 2008? This year, there are both the Leaf and the Volt. Next year several other manufacturers will be selling electric cars. How many electric car charging stations were there in the U.S. in 1990? 2008? How many are being installed this year? Next year? Fiver years from now?

        If you think nothing is changing, you have your head where it should not be.

      2. “Moreover, people are starting to buy more small, fuel-efficient cars, and stop buying big, inefficient cars. As I wrote the Hummer went out of production in 2009, because nobody was buying them.”

        The Hummer stopped being sold because GM went bankrupt and a Chinese company tried purchasing it but the government barred it based on the Hummer not being in line with it’s future environmental outlook. Yes China.

        People would still buy Hummers just like they still buy Suburbans and full size trucks which they drive to the store to get bread in. They’ll do this as long as they can afford it.

        As far as electric cars go I think it’s great, but not realistic. As a second car they’re fine to commute in (and then why aren’t you taking a train and reading a book?) but you still need a petrol burning car to go anywhere else. For now I think range extenders like the Fisker Karma are the way to go. Eventually when we have batteries that can keep the energiser bunny going for more than 5 minutes we’ll be somewhere.

      3. “As far as electric cars go I think it’s great, but not realistic. As a second car they’re fine to commute in (and then why aren’t you taking a train and reading a book?) but you still need a petrol burning car to go anywhere else.”

        Electric cars can and will work for a large percentage of trips. Dual-car households will have no problem integrating them. Single car households can rent or use Zipcar/carsharing for longer trips. I might go that route just so I can drive a convertible BMW Mini once in a while. It’s a fun car but I sure don’t want to own one. I’m 6’2″ tall and let’s face it. Seattle is really only has good convertible weather 3 or 4 months out of the year.

      4. http://www.nytimes.com/2010/02/25/business/25hummer.html

        “G.M. to Close Hummer After Sale Fails ”

        “Published: February 24, 2010

        “DETROIT — General Motors said on Wednesday that it would shut down Hummer, the brand of big sport utility vehicles that became synonymous with the term gas guzzler, after a deal to sell it to a Chinese manufacturer fell apart.

        “In January, the brand sold just 265 units in the country. Hummer sales plunged 67 percent in 2009, to a total of 9,046.”

      5. “For decades the GOP refused to mandate greater fuel efficiency in autos. This has changed. Almost everyone is on board now.”

        Where did you see that? If we get a GOP president the next time around he’ll probably repeal the increase in CAFE standards. This is the same GOP who recently tried to defund the EPA to prevent it from regulating greenhouse gases, who refused to pass a cap-and-trade system, and won’t even consider the more sensible carbon tax.

      6. Grant, you’ve pinpointed the range problem with electric cars. I would point out that there are 300-mile-range electric cars coming out next year (I am buying one), and improvements in battery technology will make those affordable within 10 years, easily.

        For really-long-distance trips, for Christ’s sake, *take a train*. We have to re-establish intercity electric train service.

      7. (FYI, if you want that 300-mile-range electric car, call Tesla Motors. And be prepared to be put on a waiting list.)

  10. The International Energy Association is on record admitting that peak conventional oil was in 2006. Yes, as in past tense. Sure, we are now ramping up unconventional oil, such as deepwater and tar sands, but those investments only makes sense at >$80/barrel. Oil firms and nations have to keep running faster to replace the depleting cheap oil with new expensive oil. As Andrew said, we pay the marginal price for every barrel of oil.

    Even mentioning peak oil is radioactive in the U.S. political discussion, but most independant observers, including the U.S. Military, have come to the same conclusion – we are nearing a supply/demand crunch that will only worsen as time moves on. Geology doesn’t care if you don’t believe in peak oil.

    The question for the future viability of any nation is how to respond:
    1. Aggresively transition your electricity and transportation systems off of oil. This would mean national-level investments in rail transit, trolley buses and dedicated bicycling facilities, as well as land use/housing policies promoting density. The book Transport Revolutions gives a great engineering-based solution.

    2. Subsidize everyone’s existing oil habit until we are too broke to do anything. Many oil-producing nations subsidize fuel to their citizens at less than $1/gallon. An economy can only afford a certain level of GDP on energy, and if everything is used trying to keep up the status quo, there is no money left to invest in alternatives. A common (pessimistic) view over at the Oil Drum is that high oil prices will cause a recession, wiping out a portion of the economy and jobs with it, along with really low oil prices. Ecomonomy improves a bit, oil prices rise, until bam!!! another deep recession. Basically everything that has happened since 2008. Rinse, repeat, until the oils are gone and we are too dirt poor to do anything.

    Its our choice, and so far both political parties in the US prefer option 2. We need some honest LEADERS with foresight, to acutally tell the people the truth and come up with a rational response.

    1. If you’re right then the US again dominates as the premier supplier of coal for the next century. At about $5/gal synfuel starts to make economic sense. The world isn’t running out of fossil fuel anytime in the next century. Atmosphere maybe but not fossil fuel.

      1. Four million barrels of synfuel per day: 60% more than US coal production of today. Coal-to-Liquids is not scalable to millions of barrels per day quantities. Invest five billion dollars, build for a few years (excluding permit process) and you have a plant that produces 70,000 barrels per day and consumes 50,000 tons of coal.
        China tried to build half a dozens of those but canceled the project after the second. Not enough coal.

    2. I have given up on sanity from our national leaders.

      However, being in touch with the tech end of things, I expect solar powered electricity to become very cheap within 10 years — cheaper than coal — and I expect batteries to get much, much, much better. This will allow for a “politics-free” transition away from oil and coal. Although it’ll suck for anyone who can’t afford the capital outlay to transition, and who’s local government is too stupid to do it for them.

      Because the US government is run by idiots, and US business is run by looters, and the government allows the looters to get away with it, and there’s practically no long-term thinking here, the new batteries and solar panels will probably be manufactured in China. But they’ll still be cheap enough for the US to import.

  11. I wonder: do the OPEC nations believe in peak oil? If they do, even Saudi Arabia and Iran should be looking to start building a non-oil economy.

    Maybe the revolutions we saw earlier this year will create governments willing to think longer-term, and rather than just protecting their terminally-ill golden goose, start hatching its eggs.

    1. Iran is ruled by a group that believes in caliphate and that the caliph should be an imam descended in a line from the Ahl al-Bayt. Saudi Arabia is a good old fashion oligarchy.

    2. Saudi Arabia is building electrically-powered rail lines. Iran is too. Iran is trying to build nuclear power plants to supply electricity. The various Emirates are pouring money into electrically-powered rail, solar panels, etc.

      The oil states are interested in having the rest of the world dependent on oil. They are, however, often run by oligarchs who can see far enough to want to make their *own* countries not dependent on oil (better to export it, yeah?).

    3. The Mideast countries know that the oil will run out, and there’s some speculation that Saudi Arabia is suppressing news that its field production is declining (i.e., that fields have past their peak). Much of the countries’ oil revenues go into enormous sovereign-wealth funds to prepare for a post-oil future. But Nathaniel is right, they don’t want to reduce external demand for their product until the last possible moment.

      I remember an old quote by the last Shah of Iran: “You Americans are so stupid, you burn up most of your oil. We use most of our oil to make things that endure (e.g., plastics).”

      That’s a wonderful platitude but I don’t think it’s true anymore. The mideast has a low gasoline price and it’s susidized to boot, and that has led to a worse SUV/suburbanism excess than in the US, especially because oil is “our region’s birthright” (and perhaps a blessing from God due to their observance of Islam). In other words, it will be extremely difficult to remove the subsidy and convince people to switch to a less oil-intensive lifestyle. Plus the fact that most of the population in these countries are poor, so removing the subsidies would cause significant hardship to them and likely provoke unrest.

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