Hoping for six-dollar gasoline

I sure hope gasoline prices keep rising.  I’m keeping my fingers crossed for six dollars a gallon—although I’ll admit that I’d be happy with $4.50 for this year.  Currently, we’re only at $3.10 per gallon, so we have some ground to cover—but we still have seven months to to achieve $4.50. 

The table below shows the gasoline cost per year at various combinations of fuel efficiency, miles driven per month, and fuel price per gallon.  The blue circle is about where a typical personal-transportation vehicle comes out.  [I arbitrarily decided the color coding, based on the amount of hysteria coming from politicians and the mainstream media for various gasoline price levels.  Today’s hysteria level places the typical personal vehicle in the yellow category, by my estimate.] 

Note that a pump price of $4.50 per gallon would move most of us 25mpg-or-less drivers close to the red “pain” category, if not inside it.  And that’ s the point: Pain is what we need.  The higher the price, the sooner we’ll achieve Oil Independence Day.   

I want to see us achieve oil independence in my lifetime, and fuel efficiency mandates won’t get us there; that’s politics, not economics.  It’s little more than putting lipstick on a pig.  Oil independence will require a new technology that leapfrogs the internal combustion engine.  My best guess is that a quick-recharging superbattery will be the breakthrough, but I’ve been wrong before, and I’d love to see something else at least as effective emerge.  Whatever the breakthrough turns out to be, it could turn the USA from an oil importer to a transportation energy technology exporter.  [Also, recharging the superbatteries using wind-, solar-, or nuclear-generated electricity would dramatically reduce CO2 emissions by all countries, not just the USA—and that in turn would yield the biggest benefit of all: a dramatic reduction in political hysteria about CO2 emissions.] 

Pain is what we need.  That’s why I hope gasoline prices keep rising.  Why do our politicians reel in horror at high gasoline prices?  It's because they're parroting what they're hearing from their constituents; but we, their constituents, are the culprits—because we like to drive as many miles as we please, in powerful cars, with access to cheap gasoline.  Something's gotta give if we are serious about oil independence: the price.  Finding a way to keep gasoline prices low is a dead end—a strategy similar to slowly boiling a frog: in the end, the frog dies.  Given that we are the frog, I’d rather we got shocked into jumping out of the water before we boiled to death, wouldn’t you? 

Would it be going too far for me to envision wistfully a few big freighters scuttled in the Strait of Hormuz?  I suppose it would.  Maybe a federal surtax on gasoline that sets a floor price of $6 per gallon would be better, with the proceeds going into the GI-Bill fund.  That should get things moving a little faster towards Oil Independence Day. 

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End notes:
(1) With Congress' approval rating lower than the president's, they won't be doing anything to raise the price of gasoline any time soon.  We'll just have to rely on market forces to get the price up where it needs to be.

(2) The frog-boiling story is apocryphal, but it’s a good metaphor.

Comments

[Aaron]

I believe econopundit had a plan for a moving tax on oil that would keep it fixed at an artificially high level for similar reasons.

[Patrick]

Steve-

I believe you should be more clear in your primary motive, which, i think, is to become independent from FOREIGN sources of oil.

Along those lines, a point to add is that higher prices will allow other sources to become economically feasible and environmentally acceptable.

There are plenty of energy resources on this continent, including oil, if the proper incentive is there to go after them.

[pawnking]

I like your stuff, Steve, but what's wrong with importing oil? How is this different than importing, say, 32" HDTVs? Or importing cars? Or importing labor? It seems clear that we will eventually move to electric cars with Nuclear power driving our transportation, but artificially accelerate the process through higher taxes now? Let the market and innovation take its course, and let the politicians get out of the way.

[rufus]

That's not necessary. Dedini, a very large company in Brazil, has broken through to producing "Cellulosic" ethanol for $1.00/gal.

http://biopact.com/2007/05/dedini-achieves-breakthrough-cellulosic.html

According to the DOE we could produce enough of this in the U.S. to completely replace our petroleum use.

[rufus]

Add in the advances that we're making in hybrid/electric and solar and we'll be replacing a lot of petroleum in the next few years.

Remember, half of all the scientists that have ever lived are "working" today.

[Steve]

Patrick:
Yes, I'd like to see the continent of North America become oil independent. We still need oil as feedstock for plastics, etc., but as soon as we don't need it for fueling personal transportation vehicles, we'll be independent.

pawnking:
Unlike HDTVs, oil is a national security issue. I'm all for free markets, but I also adhere to Adam Smith's short list of the duties of government -- and defense (national security) is at the top of his list, for good reasons that are unarguable. I've heard one libertarian argue that we should let the free market for oil run its course, but I disagree. I'd like to see the government help speed up the process of making gasoline obsolete. The fundamental question is whether or not oil is a national security concern; again, I think it is.

[pawnking]

Steve, that is a good, clear, and reasonable arguement, one with which I have little arguement. If this is indeed a national security issue, how best to address it? Is increasing fuel taxes the best policy? Offering a prize for the battery breakthrough? Subsidizing the alternative fuel industry?

[Patrick]

I guess this is as good a place as any to promote my company, which makes a specific part for fuel cell vehicles. You can learn more about it at:

www.h2systems.net

With that said, I can tell you that fuel cell vehicles are many years away, and will require a significant increase in gasoline prices before they are economically feasible. I can also tell you that a "quick charging superbattery" is not a likely option. From what I read, a super-capacitor may have some potential, but I am not an expert in this field.

rufus: i scanning the link, it appears that the cost described can only be achieved when linked to an existing sugar refining operation in order to defer costs. in my view, the ethanol fad is just that, and illustrates the counter-productivity that can arise when the government starts handing out money.

[Ariah]

rufus - Widespread ethanol production doesn't seem like an effective solution for the United States. We'd either have to shift a lot of agriculture to growing corn for ethanol (resulting in much higher food prices), or we'd have to clear enormous amounts of land so we could expand our agricultural capacity. Clearly neither option is appealing.

[James]

So you want prices to rise?
Are you crazy?
Its hard enough to raise a family in the USA and now you want to make it harder?
You are simply crazy.

[dale]

I have heard many people touting the positive aspects of raising gasoline prices. I for one dread it. I think many people forget or just don't care about the millions of us have no choice but to drive 50-75 miles a day just to get to and from work. You say "move closer to work!", "buy a car that gets better gas mileage!", "ride a bike!" None of these are options for most of us, due to economics (car payment?), lousing housing options (or too expensive), and even if I could afford a hybrid/electric - they are all crappy cars. I guess I have more of an American-centeric attitude. I don't want pain, discomfort, and a poor quality of life.

[Lucky Ducks]

you guys are lucky ducks for these prices. elsewhere in the world its much higher per gallon!

[Bob]

The last thing I want this government to do is increase a federal tax on gas. Two reasons:

1. It will really hurt the working poor that do not have access to public transportation.

2. I have no confidence whatsoever that the government would use the increased tax for anything other than some useless initiative like GW or paying down the deficit. They already collect roughly $10.5 million per day based on current usage. I have no idea where that is going....DOT perhaps?

Steve,

I've been data mining at the EIA website. One can access historical gasoline and oil prices as well as gasoline consumption. I am not finished with looking at numbers yet. However, average retail prices started to behave very differently beginning Sept. 2005 relative to prior periods. Seasonal volatility appears to be much more pronounced and I'm not seeing the same price fluctuation in oil - it's been at a ~ $60 - $70 bbl trading range since then.

Also, based on historical retail usage, the data does not appear to support a corresponding increase in demand as measured by retail consumption.

I'm not jumping on any bandwagon at all. Just trying to understand why the big recent change. See, I'm skeptical, like you. I don't give credence at all to the bloviating by folks such as Pelosi
but, I also just won't blindly agree with George Will, either.

http://www.townhall.com/columnists/GeorgeWill/2007/05/17/energy_independence

[Bob]

The last thing I want this government to do is increase a federal tax on gas. Two reasons:

1. It will really hurt the working poor that do not have access to public transportation.

2. I have no confidence whatsoever that the government would use the increased tax for anything other than some useless initiative like GW or paying down the deficit. They already collect roughly $10.5 million per day based on current usage. I have no idea where that is going....DOT perhaps?

Steve,

I've been data mining at the EIA website. One can access historical gasoline and oil prices as well as gasoline consumption. I am not finished with looking at numbers yet. However, average retail prices started to behave very differently beginning Sept. 2005 relative to prior periods. Seasonal volatility appears to be much more pronounced and I'm not seeing the same price fluctuation in oil - it's been at a ~ $60 - $70 bbl trading range since then.

Also, based on historical retail usage, the data does not appear to support a corresponding increase in demand as measured by retail consumption.

I'm not jumping on any bandwagon at all. Just trying to understand why the big recent change. See, I'm skeptical, like you. I don't give credence at all to the bloviating by folks such as Pelosi
but, I also just won't blindly agree with George Will, either.

http://www.townhall.com/columnists/GeorgeWill/2007/05/17/energy_independence

[Matt]

I agree with Steve in theory that higher gas prices will simply speed up the demand for alternative fuel sources. However, if you look at other countries, such as the case in Europe where gas is upwards of $6 a gallon, do you really see a prevalence of alternative fuel being used? Not really, I could be wrong though, if so clue me in here. More so what you see is more public transportation and a switch to more economical vehicles, such as the Smart Car. I definitely love the frog analogy though and for the most part agree with what you are saying.

[m_sterling]

For those lamenting the personal adverse effects of higher gasoline prices, I believe that is exactly the point Steve is trying to convey. The fact that so many, especially lower middle class and on down, would be hurt financially is precisely why demand for alternative fuel would skyrocket and place more private investment dollars into the hands of innovators.

Matt: The difference for Americans would probably lie with the increasingly suburban layout of our cities such that many more people like Dale (above) have to drive 50-75 miles to get to their jobs. Mass transit would not be an option.

[rufus]

That link I put up dealt with "cellulosic" ethanol. That is the kind that's made from biomass (twigs, sticks, branches, weeds, corn stover, rice straw, forest products, etc.)

The DOE estimates we can produce about 300 Billion gallons of ethanol, annually, from available biomass in the U.S. We'll be able to do it for about a dollar a gallon, shortly (to some extent, right now.)

[Patrick]

re: ethanol

By my accounting my household food budget has gone up 18% vs 2006.

The price of corn has gone up over 50%.

Keep in mind meat, poultry, cheese and dairy are all affected by the price of corn.

rufus: the process described in your link uses waste cane stalk. without the sugar production to produce the "free" cane stalk, the cost is significantly higher.

ethanol is a waste of time no matter how you make it (the drinking variety excepted). natural gas and coal are the way to go to provide "energy independence"

[colinnwn]

I don't think anyone would argue lower-income people will be hurt most by higher gas prices. But we simply MUST reduce our gas consumption and develop alternatives.

The most effective and easiest way to do this would be higher gas prices. Regulation will only assist to a point, and regulation cost is frequently higher than its realized benefits.

Even though people won't like it, they will find ways to move closer to work, buy more efficient cars, drive less, and ride a bike. The day is rapidly coming when we won't be able to meet our energy and feedstock needs with dino oil.

We can't mortgage our future to protect today's working poor, but as we craft solutions to this transitional time, we can consider ways to mitigate the negative impact on disadvantaged people.

[rufus]

Patrick, the cost of corn in your 14 oz box of corn flakes has gone up from about 2.2 cents to 4.0 cents. Corn is an incredibly cheap commodity. At today's price we're talking about Six Cents/lb.

The last time I looked food costs were up about 3% year on year. It turns out, after all the brouhaha, that the DDGS are much better feed than corn, and they only cost approx 4 cents/lb.

Patrick, I don't know if you realize that you're parrotting back the API talking points, or not; but, I'm beginning to suspect that you perceive that you have a vested interest in knocking down ethanol. It won't work. The genie is out of the bottle, and we'll all be much the better off for it in the long run.

As I said, a couple of the smartest guys on the planet are putting up a couple hundred million of their own money that they can produce cellulosic for a buck a gallon. I'm betting with them.

[Jeff Smith]

Bring on the expensive gas so all the poor people get off of the roads! $10 per gallon is worth it to drive my Ferrari leisurely to work in the mornings. To the poor and the bourgeois, I say, “let them ride the bus!”

[rufus]

BTW, Outlays at the Dept of Agriculture are down about $7 Billion ytd.

Also, it's figured that the ethanol/biodiesel industry is supporting about 160,000 jobs in the U.S. In fact, We have collected more in various taxes from the advent of the ethanol industry than the approx. $2.6 Billion tax credits.

[Fairness]

How about poor folks who live in rural areas with no access to a bus, where a car is their only means of getting to their jobs?

How about thinking about people other than rich people in big cities in your grand schemes?

[sharpsight]

"I sure hope gasoline prices keep rising."

Think for a moment about the ramifications of this silly wish... if petrol prices go up, then so does the price of everything else that's delivered by petroleum powered transport -truck, diesel-powered trains, air. Food would become dearer (farm vehicles would cost more to run as well as the transport costs), as would building supplies, clothes, homeware items, postage, air tickets, and innumerable other everyday products. Inflation would accelerate, pushing up interest rate charges on your mortgage and credit cards.

Hoping petrol/gas prices go up to force change is as insensitive and ill-considered as saying you hope people get diabetes in order to force them to change to a healthy diet. Both issues need to be addressed BEFORE the big problems emerge. Unfortunately, certain very powerful interests are making too much money from petroleum & cars (and processed foods) to want to make any changes that would respect the health of their fellow humans and that of the planet.

Just think if current car makers could develop an alternative-fuel car that could start in 30 seconds even in snowy weather, travel for 1,500 miles on a single tank, reach speeds of 120 mph, was noiseless, required no gears, generated virtually zero exhaust pollution, and could accelerate from 0 to 75 mph in 10 seconds. But hang on.. the technology exists: 80 years ago the Doble steam car could do these very things! And yet steam technology that EXISTS rarely if ever gets a mention.. attention is focused instead on dreaming about vehicles yet to be developed beyond prototypes that require you to buy hydrogen or ethanol on a more regular basis, while nothing is done on a large scale (so that people keep buying petrol).

The longer humanity delays abandoning petroleum-fuelled vehicles, the harder things will become, until change is eventually forced on us all (Ferrari drivers included).

[Bob]

For all those advocating an increase in federal tax on gasoline:

What should the government do with that money?

How confident are you that the government would actually use the money for the purpose you desire?

[PseudoNoise]

I often disagree with your point of view, but I'm right with you on this one.

I'd love to see an Apollo program for research into alternative fuels as well (you know, the whole promoting the common welfare thing). Maybe we could've had that with a President Gore, but we'll not see anything like that till at least 2009.

But yes, the more expensive, the less incentive to put our national security in danger from terrorism and global warming.

[Steve]

Fairness:
What would you think about some kind of personal transportation rebate for drivers you'd classify as poor, paid from the program's proceeds?

sharpsight:
I agree that speedier prevention would be better than a painful cure. But it isn't happening speedily enough, if at all.

Julian Simon summarized it as follows: "Heightened scarcity causes prices to rise. The higher prices present opportunity, and prompt inventors and entrepreneurs to search for solutions. Many fail, at cost to themselves. But in a free society, solutions are eventually found. And in the long run the new developments leave us better off than if the problems had not arisen. That is, prices end up lower than before the increased scarcity occurred, which is the long-run history of food supply."

Government-imposed rationing (eg, WW2) for national security reasons is the economic equivalent of a government-imposed price increase for national security reasons. The consequent economic effects are the same -- including, unfortunately, an increased incentive for black markets to form.

Bob:
I'm less confident than I'd like to be about the feds using the money as proposed, unless we got better about holding our public servants' feet to the fire. But we'd have a bit more control over that situation than we'd have in the blocked-Strait scenario. (It's obviously not an either-or choice, but both circumstances would compress the timeline.)

[Ben]

Why put the proceeds toward the GI Bill Fund or anywhere?

Isn't the simplest -- and most politically palatable -- idea to put the money in the general fund and cut other taxes to compensate?

We don't want to harm the economy by raising taxes...

-Ben

[Ken]

Here's a reverse take on the national security issue and oil dependence. The fact is that oil has kept the U.S interested in what occurs in the Middle East.

Radical Muslim hatred of us stems from our support of Israel. It would exist whether we buy oil from the Middle East or not. But since we buy oil from the Middle East we have an interest in stable goverment there.

What oil has done is make our confrontation with the radical Muslims sooner rather than later. Frankly, that is a good thing. Without U.S. support many of the pro U.S stable governments would be radicalized into anti-U.S. countries.

Eventually the U.S. would have faced a radical Muslim threat much worse than it does now.