GAS PRICES, BROCCOLI
AND DOUGHNUTS
ECNS 594
Montana Council on Economic Education
June 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?
Lots of teachable economic topics…
elasticity
social costs
Supply and
demand
real versus
nominal
Efficiency
and equity
The oil price see-saw
The downside of
rising oil prices
The upside of
rising oil prices
Oil prices? What,
me worry?
Consumers
Taxpayers
Producers
Society
Energy is Everywhere
Montana’s Energy Industries
Drilling Oil
and Gas Wells
NAICS 21311
2009 Employment = 333
Number of firms = 49
Support
Activities
for Oil and Gas
NAICS 213112
2009 Employment = 1,256
Number of firms = 159
Petroleum
Refining
NAICS 32411
2009 Employment = 1,069
Number of firms = 5
Coal Mining
NAICS 2121
2009 Employment = 946
Number of firms = 7
Colstrip Steam
Electrical Station
2009 Employment = 578
Number 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 Oil
PADD 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
Small Car Market
Price/Unit
D1
D0 D2
Quantity/Time
Large Car Market
Price/Unit
D2
D1 D0
Quantity/Time
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
242.718447
235.648977
228.785415
222.121762
215.652196
209.371064
203.272878
Value of Time Savings
Total PV of Time Savings
250
1807.57074
Annual Mileage 12,000
MPG Chevy Volt=100
MPG Chevy Cruze=30
Value of Time
$50 per hour
Total PV of Gas Savings
7194.87215
Total PV of Time Savings
1807.57074
Total Savings
9002.44289
Gas Station
Time Savings =300 minutes Per year
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
External Costs per Gallon Fuel Consumed
(2009 cents)
90
80
70
60
50
40
30
20
10
0
Rural Passenger
Vehicles
Urban Passenger
Vehicles
Rural Trucks
Urban Trucks
Social costs per mile traveled
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Rural Passenger
Vehicles
Urban Passenger
Vehicles
Rural Trucks
Urban 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
Share of Vehicle Miles Traveled, 2008
Rural Trucks
4%
Urban Trucks
4%
Rural Passenger
Vehicles
29%
Urban Passenger
Vehicles
63%
Passenger vehicles also account for
over 75% of fuel consumed…
Share of Fuel Consumed, 2008
Rural Trucks
10%
Urban Trucks
12%
Rural Passenger Vehicles
21%
Urban Passenger Vehicles
57%
3 approaches to change behavior
Fuel tax
Vehicle
miles
traveled tax
Income tax
Fuel Tax
Equity
• User pays
• Burden on poor and rural
• Increases costs of goods
Efficiency
• Low administration costs
• Incentive to curtail use
Vehicle Miles Traveled (VMT) tax
Equity
• User pays
• Burden on poor and rural
Efficiency
• Incentive to reduce use
• Administrative costs
Income tax
Equity
• All pay, not just highway users
• Avoids burden on poor and rural
Efficiency
• No incentive to reduce driving
• Administration costs negligible
$1 Trillion in profits and still at the
trough?
Subsidies and the price of gas
$952 billion
“Don’t need $36.5 billion
100 year old in subsidies
subsidies to
sell $100 per
barrel oil”
Oil companies inherit oil prices more
than drive them
Unrest in
Middle
East
Weak
Dollar
Global
Growth
Japanese
Energy
Supply
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?