Thursday, August 11, 2005
Have you ever wondered what goes through the mind of the owner of a large SUV as they stand next to their vehicle, filling it with gas at the local station? Waiting and waiting for the tank to fill, gas pump in hand, watching the numbers on the display go higher and higher.
It's kind of funny because a particular gas pump will dispense gas at the same rate, regardless of the price. When the price is higher, the numbers increment faster, somehow giving the impression that the gas is coming out faster. But it's not.
Gas tanks for sedans and small SUVs range from 15 gallons to maybe 22 gallons. The tanks on the larger SUVs, however, are much higher in capacity. With gas prices rising briskly in recent months, and with more increases to come as a result of the recent spike in the price of oil to $65 a barrel, it is natural to ask just how much gas these larger SUVs hold, and just how much it costs to fill them up.
After compiling the first of its kind "California SUV Fill Up Index", we now know the answer to both of these questions - and we have a pretty good idea how to answer the question posed in the opening paragraph.
A price of $2.70 per gallon is used in the first publication of this index, which is corroborated here - roughly midway between the highest and lowest price for regular gas as of this writing, and consistent with what we see while driving around. Gas prices are a bit higher here than in other parts of the country due to pollution controls and other factors, which, based on the size of the vehicles seen on the road these days, does not seem to have influenced buying decisions at all.
As indicated by the red line in the chart, today there are four SUVs that cost $100 or more to fill up. The next time you see one of these vehicles at a gas station, stare at the person filling it up and shake your head a bit - see what kind of reaction you get. They surely know how much it costs to fill one of these up - now you do too. There must be some level of self-consciousness when standing there, for what seems to be an eternity, while the huge tank fills.
Or, maybe that's why some owners start the pump, then hop back inside, waiting for the clicking sound indicating that the pump has turned off, so they can hop back outside and finish the transaction - all with a minimum of scrutiny by others in the area. Or, maybe not.
This chart will be updated in future posts - watch the red line.
So, why are gas prices so high and about to go higher? And, why have the world's economists done such a horrible job forecasting where the oil price would go?
It wasn't too long ago that oil was expected to return to between thirty and forty dollars a barrel and stay there. That never happened. A few months ago, it bottomed out in the mid forties, only to defiantly surge back past $50, then past $60, and then to $65 yesterday. And, this price action was achieved with no major supply disruptions - if something bad were to happen, there's no telling where the price might end up.
If you want to hear something really scary, try listening to the Jim Puplava interview with Matthew Simmons over at Financial Sense Online. He's the author of "Twilight in the Desert" which makes some dire predictions about future oil production - here's an excerpt from the transcript:
"It was really an incredible exercise of trying to collect the data no one had ever actually thought of doing before, and that’s, what are the top oil fields in the world – field by field. And the background for me doing this is that I’ve participated 2 years in a row in an energy supply workshop, conducted by the energy analysts of the CIA in Washington, where they got about 10 of the best oil experts together, and we’d spend a day doing a discussion of all the key countries, and how much oil capacity they had in place over the course of the coming 3 years. I sat there listening aghast at all of these experts with their laptops that kept looking at their supply models, and it’s how China will be producing 3,217,000 barrels/day this year, and 3,281,000 barrels/day. And I basically said: “how do you all even know that. What are the 3 or 4 top fields in China?” And no one had any answers." If you want the take from a couple economists, have a look at this Wall Street Journal debate:
"James Hamilton writes: Although it's true that some people are predicting that the peak in oil production will occur before the end of the year, I agree that it is likely to be a bit further down the road, though perhaps much sooner than 20 years from now. The market seems to share our view as well, since it's possible on today's futures market to buy oil for delivery in December 2011 for $60 a barrel, something to which traders would never agree if they thought world production was just about to enter the declining phase."So, James Hamilton is assured that peak oil is not near because the market is not pricing it that way. Hmmm... Perhaps this logic should be evaluated in light of Matt Simmons' assertion that no one really has a good idea about what the reserves really are. This was demonstrated some time ago by Royal Dutch/Shell when they made some massive downward revisions to their reserve estimates - it seems the part-time employee who was responsible for the reserve estimates had been providing faulty data.
Maybe this is one of the reasons that economists don't do well with their oil price forecasts - they believe all the reserve estimate numbers.
Peak Oil and the Fed
One of the most intriguing aspects of peak oil and its impact on oil and gasoline prices is the role of China and the U.S. Federal Reserve. It is clear that the monetary stimulus applied by the Fed since 2001 has had a large role in the economic boom in China and has resulted in a dramatic increase in oil consumption in that part of the world.
This increased demand is, to some degree, driving today's oil price. Whenever peak oil does occur, it surely will be sooner than it otherwise would have been had U.S. monetary policy not so stimulated these economies half way around the world.
Did the Greenspan Fed cause $65 oil? No, but they sure haven't helped to keep the price down.