R-Squared Energy Blog

Pure Energy

How Much Natural Gas to Replace Gasoline?

I Took This Picture of a CNG Bus on a Recent Trip to D.C.

You may have seen the news this week that a report by the Potential Gas Committee says natural gas reserves in 2008 rose to 2,074 trillion cubic feet. The New York Times and the Wall Street Journal (via Rigzone) both had stories on it, and T. Boone Pickens issued a press release. First, from the New York Times (and this is a really good article):

Estimate Places Natural Gas Reserves 35% Higher

Thanks to new drilling technologies that are unlocking substantial amounts of natural gas from shale rocks, the nation’s estimated gas reserves have surged by 35 percent, according to a study due for release on Thursday.

Estimated natural gas reserves rose to 2,074 trillion cubic feet in 2008, from 1,532 trillion cubic feet in 2006, when the last report was issued. This includes the proven reserves compiled by the Energy Department of 237 trillion cubic feet, as well as the sum of the nation’s probable, possible and speculative reserves.

The new estimates show “an exceptionally strong and optimistic gas supply picture for the nation,” according to a summary of the report, which is issued every two years by a group of academics and industry experts that is supported by the Colorado School of Mines.

The Wall Street Journal wrote:

US Has Almost 100-Year Supply of Natural Gas

The amount of natural gas available for production in the United States has soared 58% in the past four years, driven by a drilling boom and the discovery of huge new gas fields in Texas, Louisiana and Pennsylvania, a new study says.

…the Potential Gas Committee’s study was prepared by industry geologists who analyzed individual gas fields using seismic imagery and production data provided by gas producers. The surge in gas resources is the result of a five-year-long drilling boom spurred by high natural-gas prices, easy credit and new technologies that allowed companies to produce gas from a dense kind of rock known as shale. The first big shale formation to be discovered, the Barnett Shale near Fort Worth, Texas, is now the country’s top-producing gas field, and companies have made other huge discoveries in Arkansas, Louisiana and Pennsylvania. Together, the shale fields account for roughly a third of U.S. gas resources, according to the Potential Gas Committee.

Pickens had this to say:

T. Boone Pickens Statement on Surge in Estimated Natural Gas Reserves

Today’s report substantiates what I’ve been saying for years: there’s plenty of natural gas in the U.S. I launched the Pickens Plan a year ago to help reduce our dangerous dependence on foreign oil, and using our abundant supply of natural gas as a transition fuel for fleet vehicles and heavy-duty trucks is a key element of that plan. On the same day this report is going out, diesel prices are again on the rise, squeezing the trucking industry. Now more than ever we need to take action to enact energy reform that will immediately reduce oil imports.

The 2,074 trillion cubic feet of domestic natural gas reserves cited in the study is the equivalent of nearly 350 billion barrels of oil, about the same as Saudi Arabia’s oil reserves.

A number of people have rightly pointed out that a 100-year supply implies usage at current rates. But it got me to thinking about how much natural gas it would take to displace all U.S. gasoline consumption. So in the spirit of my previous essay Replacing Gasoline with Solar Power, I will do the same calculation for replacing gasoline with natural gas. The big difference between this calculation and the earlier one is that solar power still has some technical issues to resolve (e.g., storage) and electric vehicles are not yet ready for prime time. On the other hand we are perfectly capable, today, of displacing large numbers of gasoline-fueled vehicles with natural gas.

How Much Do We Need?

The U.S. currently consumes 390 million gallons of gasoline per day. (Source: EIA). A gallon of gasoline contains about 115,000 BTUs. (Source: EPA). The energy content of this much gasoline is equivalent to 45 trillion BTUs per day. The energy content of natural gas is about 1,000 BTUs per standard cubic foot (scf). Therefore, to replace all gasoline consumption would require 45 billion scf per day, or 16.4 trillion scf per year. Current U.S. natural gas consumption is 23 trillion scf per year (Source: EIA). Therefore, replacing all gasoline consumption with natural gas would require a total usage of 39.4 trillion scf per year, an increase in natural gas consumption of 71% over present usage.

Assuming for the sake of argument that the 2,074 trillion standard cubic feet cited in the study is accurate, that the “probable, possible and speculative reserves” eventually equate to actual reserves, and that the gas is economically recoverable, that is enough gas for 53 years of combined current natural gas consumption and gasoline consumption. If you assume that only the proven plus probable reserves are eventually recovered, the amount drops to about 1/3rd of the 2,074 trillion scf estimate, still enough to satisfy current natural gas consumption and replace all gasoline consumption for almost 20 years.

We can also calculate in terms of oil imports. Right now the U.S. imports about 13 million barrels per day of all petroleum products. A barrel of oil contains around 5.8 million BTUs, but oil only makes up 10 million of the 13 million barrel per day figure. Other imports include things like gasoline (4.8 million BTUs/bbl) and ethanol (3.2 million BTUs/bbl). Scanning the list of imports, I probably won’t be too far off the mark to presume that the average BTU value of those 13 million bpd of imports is about 5.4 million BTUs/bbl. On an annual basis, this equates to 25.6 trillion scf of natural gas, which would be an increase over current natural gas usage of 111%. Going back to the 2,074 trillion scf from the study, this would be enough to displace imports of all petroleum products (again, at current usage rates and not factoring in declining U.S. oil production) for 43 years.

What’s the Cost?

Natural gas is presently trading at about $4 per million (MM) BTU (although December 2009 is trading at almost $6). Oil is presently trading at $71/bbl, which equates to $12.24/MMBTU. Gasoline is presently trading at over $17/MMBTU. Thus, natural gas is a bargain relative to oil or gasoline. Incidentally, I just checked on seasoned wood and wood pellets, and they range from $8-$12/MMBTUs. So it is cheaper to heat your house with gas than with wood. I am not sure I would have guessed that.

While natural gas is a bargain relative to gasoline, converting a gasoline-powered vehicle to natural gas isn’t cheap. According to this source, it can cost $12,500 to $22,500 to convert a gasoline-powered car to natural gas. Honda makes a compressed natural gas (CNG) vehicle, but according to this review in Car and Driver the premium over the gasoline version is $8780. A person would need to drive an awful lot to justify that premium. However, that’s what fleets do. They drive a lot. The large price differential explains why fleets would be interested in running their vehicles on natural gas.

Conclusions

So, the good news is that the United States could be energy independent if the newly released natural gas reserve numbers are remotely accurate. It also appears that we have enough natural gas available that civilization isn’t going to end any time soon due to lack of energy supplies. There are three caveats. First, energy independence via natural gas could require us to spend significantly more for personal automotive transportation. Second, “possible” reserves may never materialize. Finally, a large chunk of the calculated reserves are based on shale gas, and that requires gas to be in the $6-$8/million BTU range to be economical. Still, it is a bargain compared to gasoline, and it explains why fleets are more receptive to conversion to natural gas than the general public is likely to be for their personal vehicles.

June 19, 2009 Posted by | CNG, energy consumption, gasoline, gasoline demand, gasoline imports, natural gas, oil consumption, oil imports, T. Boone Pickens | 63 Comments

The Lawyers Win on Hot Gas

I recently wrote an essay called A Lost Litigation Opportunity in which I discussed the root of the so-called ‘hot gas’ issue. I firmly believe that this is all about the big business of lawyers who sue people for a living. The California Energy Commission had ruled out temperature compensation equipment, saying that consumers would pay more because retailers would pass on the cost of the equipment.

I thought the issue would now fade away, but a recent story involving Costco suggests that the litigators – like those behind certain ‘consumer organizations’ who have pushed this issue so hard – are starting to profit:

Petroleum Marketers Respond to Costco’s Attempt To Settle ‘Fair Fuel’ Lawsuit

Here are the interesting bits:

“But it [settlement] saves Costco the costs of defending themselves in this class-action litigation,” Gilligan added, noting there are 120 other retailers and groups being sued.”

“Unfortunately, trial attorneys have become quite skilled at presenting companies with difficult decisions: either incur significant expense to erect a legal defense against outrageous claims or cut costs by reaching some sort of settlement. Neither are attractive options when the retailer has done nothing wrong, but the trial attorneys are good at setting this trap.”

One other point: Costco’s agreement including payment of the plaintiffs’ attorney fees.

That’s what this is all about. It won’t save consumers a dime. In fact, it will cost consumers, and it will cost retailers. But trial lawyers that back phony consumer organizations who them drum up controversies should do OK.

May 3, 2009 Posted by | gasoline, litigation | 8 Comments

A Lost Litigation Opportunity

While the so-called ‘hot gas’ issue has been discussed here several times before, there are new developments out in California that have Oil Watchdog and the $295/hr lawyer behind this ‘consumer organization’ crying over lost litigation opportunities. Given the time, effort, and money they have put into this issue, the events described in this essay are quite a blow for them.

At least they will now have more time to devote to their other campaigns, such as 1). Stopping oil companies from donating money to universities; and 2). Berating oil companies for not giving enough to universities. (They make more sense if you view them as a satirical site along the lines of The Onion. The only problem is that Oil Watchdog is trying to be serious). I think it is particularly curious that the press uncritically accept and quote those associated with Oil Watchdog as consumer advocates trying to do the right thing by consumers, when a cursory investigation would show what they are (hypocritically) up to.

First, here are a few of the links to previous discussions of the issue:


Hot Gas Lawsuit in Utah

More on Hot Gas Lawsuit

Hot Gas Issue Heating Up

Hot Gas is a Bunch of Hot Air

In a nutshell, the issue is that gas expands when the temperature is warm, and so a gallon of ‘hot’ gas has less energy than a gallon of cooler gas. This means you aren’t getting the same amount of energy from your gasoline that is hot, therefore “you are being ripped off.”

This is the kind of issue that an organization like Oil Watchdog was built for. They can hype up the controversy, get outraged people to send them donations (after all, who is going to protect the little guy from Big Oil if not them?), and try to get some litigation going to benefit people like the professional litigator who is behind the site. His own website says that he “has focused on suing insurance companies that overcharge or mistreat consumers, in violation of state laws; cell phone companies for billing mistakes and poor service; and HMOs and health care companies for providing shoddy health care and refusing to pay people’s claims.” Just imagine the potential windfall if he can get a class action going by convincing enough people that deep-pocketed Big Oil is overcharging and mistreating them. That would certainly earn him more money than 99.99% of the “greedy” people in the oil industry.

Oil Watchdog – a spin-off of the Foundation for Taxpayer and Consumer Rights (see this story for the dirt on why they do what they do and evidence of who is behind the site) – has fought to force installation of temperature compensating equipment so that the gallon is corrected for temperature. That means when the gas is warm, you get a little more than a gallon, but when the gas is cold you get less. So what’s wrong with that? Basically, as I discussed at the links above, it belies a real misunderstanding of just what the outcome would be.

Imagine for a moment that you redefine a gallon so that the new volume is now equivalent to 1.5 of the old gallons. Do you think the price for a gallon of gasoline would stay the same? Of course it wouldn’t. You would pay 1.5 times as much for it. This is what Oil Watchdog and others pushing for this legislation could never absorb: It wasn’t going to work as they claimed, because as soon as the size of the gallon changes (which is what temperature compensation does), the price will change. You would probably find more variation in energy content just based on how the gasoline is blended. (Imagine how outraged they will be when they finally figure out that ethanol is contributing to gasoline with lower energy density, or that energy density varies between summer and winter.)

Oil Watchdog has really been on top of this issue, issuing press release after press release to make sure everyone knew how badly consumers were getting ripped off. Yet despite all that effort, the California Energy Commission has ruled against them:

Commission says fixing ‘hot fuel’ would drive up fuel prices

This is of course what I have been saying since this issue first cropped up. From the article:

The California Energy Commission says forcing retailers to install temperature-compensation devices on fuel pumps would drive up the price.

Officials with the Owner-Operator Independent Drivers Association challenge that claim, saying a one-time investment by fuel companies is part of doing business and would save consumers money in the long run.

During a business meeting Wednesday, March 11, the California Energy Commission recommended against forcing retailers to implement automatic temperature compensation, or ATC, at the pump.

Retail fuel is currently sold as a 231-cubic-inch gallon and does not take temperature into account. Elementary physics shows that all liquids expand and contract with temperature changes.

State and federal law does not require fuel retailers to compensate for temperature, but consumer groups and some lawmakers are trying to change that.

Directed by state law AB868, the California Energy Commission studied fuel temperature and evaluated the cost of implementing ATC at retail pumps.

“If retail station owners and operators continue (are) to grow and remain profitable, then retail station owners will most likely raise their fuel prices to compensate for selling fewer ‘gallons,’” commissioners wrote in the report. “If this is the case, then expected benefits for retail motorists will be essentially zero.”

Oil Watchdog of course wasn’t going to take that lying down, so they have issued a series of press releases charging conflicts of interest and anything else they think will stick (and draw attention away from all of their donors’ money they wasted on this). Here was their latest press release on the issue:

Documents Show Political Appointees Interfered With Cal. Energy Commission Study Of Hot Fuel Ripoff To Protect Oil Companies

Personally, I think that’s too subtle, but what do I know? I am not an ace journalist like the staff at Oil Watchdog.

As I have documented previously, Oil Watchdog started censoring comments following their stories because people were consistently demolishing their claims. Some of the comments are very good, though. So below I have copied one of those comments that Oil Watchdog conveniently put out of sight by default (and you will see why they started doing that). This is a typical sort of blistering rebuttal they often receive following some of their hysterical “essays”, which finally resulted in them frequently labeling those who disagree with them as “Shills for Big Oil.” What else were they going to do, debate the technical merits?

It is a bit long, but a highly entertaining example of what happens when an organization completely devoid of any technical people on their staff pumps out the misinformation they do. As the poster below points out, there seems to be no due diligence at all, but the reason for that becomes clear when one understands their actual objectives.

———————-

Oil Watchdog presents the hot fuel issue as one hoisted on the public by Big Oil. Without defining Big Oil, we have to assume she [Judy Dugan] means large refiners and integrateds, as opposed to retailers. Let’s examine the facts in this case, instead of the anecdotes.

The claim is that an annual $400,000,000 in excess revenue is generated dishonestly in California. As Oil Watchdog is clearly biased in this case (they are after all paid to criticize the oil industry), we can safely assume that this figure is probably at the very highest end of the impact spectrum. But let’s take it anyway, and break the figure down and see, to a reasonable approximation, just who is getting what from hot fuel. By the way, I’ll state here that the more accurately fuel can be dispensed, the better for consumers. But the real issue is, not what is the best technical solution, but whether consumers would benefit from ATC. Oil Watchdog sweeps the latter point under the rug and presents ATC purely as a morality play.

The simple analysis goes as follows:

$400,000,000: Oil Watchdog’s claimed ripoff. This is in the form of revenue to the retailers.

10% profit margin: we are here mixing refiners and integrateds, so it’s not a bad approximation. But we’ll reach the same conclusion below with any reasonable range of profitability assumptions.

$40,000,000: hot fuel profit to the industry.

Who is getting this? We know it only applies to the retail level (as Dugan has reported herself) since refiners sell their fuels corrected for temperature.

Here are the market shares of California refiners, as reported by the state of California:

Company CA Market Share, Gasoline
BP 19%
Chevron 19%
Valero 13%
ConocoPhillips 12%
Tesoro 11%
Shell 10%
ExxonMobil 6%
Big West 2%
Kern 1%
New West 1%
Petro-Diamond 1%
Tower Energy 1%
IPC 1%
Others 3%

In terms of industry concentration, this market does not look particularly concentrated when compared to other critical industries, such as automobiles, computers, or tires. So the case for conspiracy is weak on the basis of market share alone. At the level of the state of California, the Herfindahl Index for refining would be about 1300, well below the 1800 that might start getting attention at the Department of Justice. In fact, the DOJ considers industries in the range of 1000 to 1800 as being only “moderately concentrated.”

We now want to take the $40,000,000 hot fuel profit derived above, and allocate it to the state’s refiners. But first, as Dugan knows and has reported, we know that Big Oil has largely exited the retail sales business. In fact, she has quoted the widely published fact that about 97% of retail sales go to retailers, and not to Big Oil. So we need to allocate 3% of the $40,000,000, or $1,200,000, to Big Oil refiners by market share. When we do that we get the table below (here showing Big Oil shares).

Company Share of Hot Fuel Profit
BP $228,000
Chevron $228,000
ConocoPhillips $144,000
Shell $120,000
ExxonMobil $72,000
Combined Retailers $38,800,000

Clearly, the benefit to Big Oil, by Dugan’s own figures, of hot fuel in California would not even cover the cost of a lawyer for each company. In short, Big Oil could really care less about hot fuel in terms of impact to the bottom line. ExxonMobil’s hot fuel take in California represented about 0.00018% of its total profit. It probably spends many times that on landscaping or office water coolers.

And just as clearly, we see that the retailers should have a vested interest in the outcome. But when you consider that there are about 12,000 gas stations in California, you find that

$38,800,000/12,000 = about $3200 annual hot fuel profit per gas station.

In other words, the average California station doesn’t appear to be getting a huge jolt from this either. I think we can safely assume that this is not a profit grab by Big Oil, or even the retailers: the retailer opposition is probably based more on avoidance of ATC costs and maintenance.

But the really interesting point to be made here is that on the one hand Oil Watchdog charges this group of retailers with fraud, but on the other hand claims that the retailers will now absorb the cost of the equipment and maintenance, to the benefit of consumers. What if Oil Watchdog is wrong, and the consumers end up behind in the long run? This strong possibility is essentially ignored. For reference, the average consumer, if he drives 15,000 miles per year and gets 20 mpg, is paying a little under $19 per year on hot fuel (based on the $400,000,000 divided by gallons sold in California, or 2.6 cents per gallon). What if the retailers pass along an average of 4 cents per gallon? Why not? Aren’t they conspiring to rip us off now anyway? After all, each retailer will know that his competitors are facing the same new expense. The whole episode would probably be a futile exercise in money laundering in which no one benefits. This is one of the reasons why the American Trucking Associations, the nation’s spokesman for the trucking industry, opposes ATC. Any charge that the ATA has a vested interest in higher fuel prices is not credible.

If the potential buyer of Judy Dugan’s $5000 used car finds a defect in the engine (perhaps a microscopic hole in a piston) that might cost him 8 extra gallons of gas per year (near our $19 hot fuel cost), and Dugan learns it will cost $500 to replace the piston, will it be a good thing for the buyer if she does that and charges him $5500? Dugan is, after all, selling a car which she knows has a hidden foot on the gas pedal. Or would she just negotiate a new price and let the market make the correction? Isn’t that in fact what retailers are doing? As the market shares above show, and as recent steeply falling gasoline prices have proven, the industry is competitive. Unless they conspire, it would seem that no one retailer could make incremental profit off hot fuel as long as a competitor somewhere was willing to cut into that profit to gain market share. The market will equilibrate to a rate of return acceptable to competing retailers. Introduce a retail cost perturbation into the system, as in ATC, and prices will tend to adjust to maintain that equilibrium margin, unless one believes that the retailers will now stop ripping us off and simply accept lower incomes.

One gets the sense that Oil Watchdog does not understand the concept of cost-benefit analysis, and instead subscribes to the simple belief that anything bad for the oil industry must be good for consumers. The representation of hot fuel as a willful fraud perpetrated by Big Oil, when Oil Watchdog has acknowledged that refiners deliver temperature corrected fuel to retailers, is negligent and cynical…. or just plain dishonest. There is an underlying perception that this issue is one of self-interest for Oil Watchdog, a feather in their cap so to speak, or perhaps justification for existence in a world where the recent steep drop in prices prove that oil companies cannot set those prices, thus muting many of Oil Watchdog’s past charges. The rug being pulled from under its feet, Oil Watchdog needs a new pretext for its sources of funding.

Now, Oil Watchdog may in fact be correct on this issue. There is a lot of uncertainty in the data and therefore conclusions on hot fuel cost estimates, and future market responses to ATC installation cannot be predicted with certainty. But they make no credible case, and reasonable calculations based on their own numbers raise legitimate doubts as to who really benefits. Unfortunately, instead of pursuing an impartial quantitative analysis, they turn ATC into a witch hunt and go after the usual suspects. Their motivation appears above all else to be giving the oil industry a black eye; consumer benefit is assumed, and not investigated. The possibility that they could be wrong, and therefore that they could be hurting consumers, takes a back seat. There does not appear to be any due diligence on Oil Watchdog’s part to demonstrate that their position on ATC would result in a net benefit to consumers.

March 18, 2009 Posted by | California, FTCR, gasoline, Judy Dugan, litigation, oil watchdog | 43 Comments

Perpetual Confusion over Energy Balances

People continue to be confused about the energy balance of gasoline versus ethanol. The ethanol lobby, in my opinion, deliberately spreads this sort of misinformation to persuade people that producing ethanol is a wise usage of our BTUs. I have tried to clear up the confusion on a number of occasions, most recently when Vinod Khosla once again claimed “corn ethanol has almost twice the energy balance compared to gasoline“:

The Handy-Dandy Khosla Refuter

But the issue lives on, as strong as ever. A couple of days ago, Stuart Staniford wrote the following essay at The Oil Drum:

The Fallacy of Reversibility

In the essay, Stuart takes on one of the major tenets of many peak oilers: That peak oil will mean a return to localized agriculture. Stuart argued that it would not. I warned him that he would take his lumps for arguing against a popular position (and he did) just as I did when I have argued against the peak oil conventional wisdom that Saudi oil production has peaked.

But in that thread, the energy balance issue once again came up. And here was one response:

I hate to jump in because I went round and round with RR on this a while back, but also because I think the costs of ethanol are being externalized, particularly water costs, and I don’t like seeing food go to fuel. But I agree with you. The slight-of-hand that Nate is using is that he ignores the oil feedstock when refining oil, but you have to include it when making ethanol (system boundaries have to be drawn that way I have been told), so you get this 8:1 number for oil refining and 1.3:1 for ethanol, and all the “awl bidness” folk say QED.

BUT… for grins, lets suppose all the oil you had in the world was 1800 barrels. When that is gone you are out, kaput, no more. Then you can ask what will I do with this. Well you could pump and refine it into diesel using 200 barrels and ending up with 1600 barrels of diesel. 8:1 OK well and good.

Or you could take take that 1800 barrels less pumping cost (let’s say negligent for argument sake) and produce 2340 (1.3 x 1800) barrels of oil equivalent in ethanol.

Now for further grins, let’s assume that the usage is 540 barrels per year. Having pumped and refined diesel you will be out, kaput, done, in about 3 years, but when making ethanol, each year, when a new crop is planted you will still have 1800 barrels, and now you have a sustainable energy supply. Woohoo!

Now these “ethanol haters” will rightfully claim that we can’t replace our current FF useage with ethanol, ignoring the fact that they have been spouting nonsense about efficiency of oil versus ethanol. But with the right ethanol production from say celulosic sources, we could ease the burden on the oil consumption extending our nonrenewable resources, particularly so, if we also agressively conserve oil and recycle some of the water used in ethanol production. Here you will be told that the “devil is in the details”, because there is no viable celulosic process. But hold on now, GE just invested in just such a process, with the idea that they could build many plants and replace about 15% of the FF use in the future. The first plant goes on line this year if everything goes perfectly :). Anyway, you’ll go blue in the face arguing with some of these folk as they set system boundaries to ensure that oil refineries appear efficient compared to ethanol, wihtout a thought for extending the present supply of FF.

Naturally, I responded to it:

You were wrong the last time, and you are wrong now. You are not making an efficiency argument. The argument “what if there was no more oil…” is not an efficiency argument. You are correct, if there was no more oil, then it’s a different argument. But then if there was no more oil, the whole charade would come tumbling down anyway.

The oil feedstock is ancient, captured solar energy. You do not include that when doing the energy balance, any more so than you include the corn BTUS – recently captured solar energy – when doing the ethanol EROEI. (What you do include is the portion of the BTUs that were due to the fertilizer). This is what you, and so many others who are confused on this issue do not see.

What is counted in the ethanol EROEI is the energy it took to grow the corn, turn it into ethanol, and purify it. What is counted in the gasoline EROEI is the energy to extract the oil and to refine the oil. The portion of the feedstock BTUs that amount to captured solar energy are not counted in either case. Ethanol proponents wish to count them in the case of oil but not ethanol, which is why they say nonsensical things like “It is more energy efficient to produce ethanol than to produce gasoline.”

QED.

I think it’s that captured solar energy portion that they don’t seem to get. It’s really not that difficult of an argument, in my opinion. And the argument often shifts, as it did above, to “suppose we had no more oil….” But that is not an efficiency argument. It is a valid argument, just not an efficiency one. But as we debate that argument I think we need to understand, as a society, what it means to transition from an energy return of better than 5/1 in the case of petroleum to something that is around 1, plus some animal feed that gets counted as a fraction of a BTU.

January 23, 2008 Posted by | energy balance, ethanol, gasoline | 106 Comments

Gas Boycotts and Gas Prices

Gas Boycotts

You have probably gotten the e-mails. “Don’t buy gas on Wednesday of next week and force the oil companies to lower prices.” Or, “Boycott Shell this week, ExxonMobil next week, etc.” Sometimes I explain to people why these schemes won’t work, but most of the time I just delete them. But MSNBC took time out today to address the issue:

Why one-day gasoline ‘boycott’ won’t work

But suppose that, through some magical force of nature, you managed to shut down every gasoline-powered vehicle and device for one day. Let’s look at how much money would be involved and what would happen to it:

Based on current demand of about 386 million gallons a day, at $3 a gallon, the total value of gasoline sold daily in the U.S. comes to almost $1.2 billion. But that’s the total retail value — the pot of money that’s divvied up along a chain of oil producers, pipeline operators, refiners, wholesalers, truckers and retailers. Let’s follow the chain and see who gets to keep what.

It’s a pretty good read, and goes into the details of where the money ends up along the supply chain (which should demonstrate quite clearly that you aren’t being gouged). Now, if you really want prices to come down, make your boycott permanent. If everyone can reduce their actual consumption by 10%, and not just for 1 day, that would bring about downward pressure on prices.

Gas Prices Set Record

I have been beating this drum for weeks. In fact, I would have to check, but I may have been warning about this for months. If you have been watching the gasoline inventory data, which I discuss every week when the EIA releases the numbers, you could see this coming: Record low gasoline inventories are going to drive record high gas prices. And according to another MSNBC story, we have reached that point:

Average pump price hits record $3.07 a gallon

CAMARILLO, Calif. – Gasoline prices have surged to a record nationwide average of $3.07 per gallon, nearly 20 cents higher than two weeks earlier, oil industry analyst Trilby Lundberg said Sunday.

The previous record was $3.03 per gallon on Aug. 11, 2006.

Rising prices have reduced demand, but it is still running ahead of last year’s numbers. Where are we headed from here? Depends on inventories. But you knew I would say that. I haven’t seen any predictions yet for this week, and I am not going to make any (though with prices still going up, I have to believe demand is going to taper off below last year’s numbers). Anyway, we will know in 48 hours.

May 7, 2007 Posted by | gas inventories, gas prices, gasoline, MSNBC | 5 Comments

Gas Boycotts and Gas Prices

Gas Boycotts

You have probably gotten the e-mails. “Don’t buy gas on Wednesday of next week and force the oil companies to lower prices.” Or, “Boycott Shell this week, ExxonMobil next week, etc.” Sometimes I explain to people why these schemes won’t work, but most of the time I just delete them. But MSNBC took time out today to address the issue:

Why one-day gasoline ‘boycott’ won’t work

But suppose that, through some magical force of nature, you managed to shut down every gasoline-powered vehicle and device for one day. Let’s look at how much money would be involved and what would happen to it:

Based on current demand of about 386 million gallons a day, at $3 a gallon, the total value of gasoline sold daily in the U.S. comes to almost $1.2 billion. But that’s the total retail value — the pot of money that’s divvied up along a chain of oil producers, pipeline operators, refiners, wholesalers, truckers and retailers. Let’s follow the chain and see who gets to keep what.

It’s a pretty good read, and goes into the details of where the money ends up along the supply chain (which should demonstrate quite clearly that you aren’t being gouged). Now, if you really want prices to come down, make your boycott permanent. If everyone can reduce their actual consumption by 10%, and not just for 1 day, that would bring about downward pressure on prices.

Gas Prices Set Record

I have been beating this drum for weeks. In fact, I would have to check, but I may have been warning about this for months. If you have been watching the gasoline inventory data, which I discuss every week when the EIA releases the numbers, you could see this coming: Record low gasoline inventories are going to drive record high gas prices. And according to another MSNBC story, we have reached that point:

Average pump price hits record $3.07 a gallon

CAMARILLO, Calif. – Gasoline prices have surged to a record nationwide average of $3.07 per gallon, nearly 20 cents higher than two weeks earlier, oil industry analyst Trilby Lundberg said Sunday.

The previous record was $3.03 per gallon on Aug. 11, 2006.

Rising prices have reduced demand, but it is still running ahead of last year’s numbers. Where are we headed from here? Depends on inventories. But you knew I would say that. I haven’t seen any predictions yet for this week, and I am not going to make any (though with prices still going up, I have to believe demand is going to taper off below last year’s numbers). Anyway, we will know in 48 hours.

May 7, 2007 Posted by | gas inventories, gas prices, gasoline, MSNBC | 11 Comments

Hot Gas Lawsuit in Utah

I wrote this up a couple of weeks ago, but never got around to posting it. I guess business is slow for the folks who sue people for a living:

Suit Seeks to Deflate Excess ‘Hot Gas’ Profit

Source: Salt Lake Tribune

Mar. 7–When the temperature of gasoline rises, the volume of the fuel expands.

And that means Utah drivers who fill up during the summer may get fewer miles out of a tank of gas than during the colder months, when the temperature of the fuel they pumped into their automobiles and pickups was lower.

The prospect that motorists may not always be getting all the energy from each gallon of gasoline that they paid for has ignited a growing controversy across the country.

“This is a serious problem, especially with truckers” whose livelihoods are tied to the cost of fuel, said C. Val Morley, an attorney in American Fork who filed the proposed class action lawsuit. “Similar lawsuits have been filed in other areas of the country.”

About 100 years ago, federal regulators determined that a gallon of gasoline would be 231 cubic inches of fuel measured when it was 60 degrees. And it is that 231 cubic inch per gallon standard that is used on gasoline pumps in Utah and across the country.

While it is true that fuel expands when the temperature rises, the impact on the volume of liquids is very low. I expect the attorneys in the class action lawsuit to learn the hard way, but here is what they will find out.

First, according to my chemical engineering handbook, the change in volume of gasoline in going from 60 to 90 degrees would be about 1%. So, if this sort of temperature rise actually happened, you would be getting about 1% less gas for the same money. BUT, gasoline tanks are buried underground. How often do you think those gas tanks reach 90 degrees? Probably never. In fact, those tanks are probably pretty close to 60 degrees year round, which means the class action lawsuit is just a waste of the court’s time.

I would also point out that this cuts both ways. The volume of gas shrinks at colder temperatures. So, if you fill up when it is less than 60 degrees, you are getting more gas for the same money. So, even if the tanks were above ground, unless the average annual temperature is above 60 degrees, there would be no net loss on the amount of gasoline you got for your money (unless you are just filling up in the summer). Furthermore, due to the many different components that go into gasoline, individual blends undoubtedly differ by more than 1% in their BTU content anyway (and this also varies with the seasons).

This is a good example of one of those nuisance lawsuits that makes everything more expensive for all of us. These are drummed up by lawyers who must find someone to sue in order to stay in business. The following is the true motive behind the lawsuit:

The Utah lawsuit contends that hot gasoline is costing American motorists a couple of billion dollars a year and drivers in this state millions annually. And it contends that money represents excess profits for the big oil companies.

And they want a piece. The truth is merely an inconvenience. All they need to do is find an ignorant jury and they have it made. I wonder if the O.J. Simpson jury is busy.

March 20, 2007 Posted by | gasoline, litigation, Utah | 12 Comments

Hot Gas Lawsuit in Utah

I wrote this up a couple of weeks ago, but never got around to posting it. I guess business is slow for the folks who sue people for a living:

Suit Seeks to Deflate Excess ‘Hot Gas’ Profit

Source: Salt Lake Tribune

Mar. 7–When the temperature of gasoline rises, the volume of the fuel expands.

And that means Utah drivers who fill up during the summer may get fewer miles out of a tank of gas than during the colder months, when the temperature of the fuel they pumped into their automobiles and pickups was lower.

The prospect that motorists may not always be getting all the energy from each gallon of gasoline that they paid for has ignited a growing controversy across the country.

“This is a serious problem, especially with truckers” whose livelihoods are tied to the cost of fuel, said C. Val Morley, an attorney in American Fork who filed the proposed class action lawsuit. “Similar lawsuits have been filed in other areas of the country.”

About 100 years ago, federal regulators determined that a gallon of gasoline would be 231 cubic inches of fuel measured when it was 60 degrees. And it is that 231 cubic inch per gallon standard that is used on gasoline pumps in Utah and across the country.

While it is true that fuel expands when the temperature rises, the impact on the volume of liquids is very low. I expect the attorneys in the class action lawsuit to learn the hard way, but here is what they will find out.

First, according to my chemical engineering handbook, the change in volume of gasoline in going from 60 to 90 degrees would be about 1%. So, if this sort of temperature rise actually happened, you would be getting about 1% less gas for the same money. BUT, gasoline tanks are buried underground. How often do you think those gas tanks reach 90 degrees? Probably never. In fact, those tanks are probably pretty close to 60 degrees year round, which means the class action lawsuit is just a waste of the court’s time.

I would also point out that this cuts both ways. The volume of gas shrinks at colder temperatures. So, if you fill up when it is less than 60 degrees, you are getting more gas for the same money. So, even if the tanks were above ground, unless the average annual temperature is above 60 degrees, there would be no net loss on the amount of gasoline you got for your money (unless you are just filling up in the summer). Furthermore, due to the many different components that go into gasoline, individual blends undoubtedly differ by more than 1% in their BTU content anyway (and this also varies with the seasons).

This is a good example of one of those nuisance lawsuits that makes everything more expensive for all of us. These are drummed up by lawyers who must find someone to sue in order to stay in business. The following is the true motive behind the lawsuit:

The Utah lawsuit contends that hot gasoline is costing American motorists a couple of billion dollars a year and drivers in this state millions annually. And it contends that money represents excess profits for the big oil companies.

And they want a piece. The truth is merely an inconvenience. All they need to do is find an ignorant jury and they have it made. I wonder if the O.J. Simpson jury is busy.

March 20, 2007 Posted by | gasoline, litigation, Utah | 24 Comments

Why Are Gas Prices Rising?

Gas prices are once again headed higher, and most people are probably wondering why. The Charleston Gazette (1) provides a typical reaction:

Lee Franc, a client manager from St. Petersburg, spent about $40 to put 16 gallons in her Toyota Highlander. She works at home and can go a week or two without filling up.

“Katrina, I can understand,” Franc said. “I didn’t see a very good explanation this time. You hear so many excuses it gets to where you don’t believe anything anymore.”

The thing is, they are not excuses. There are valid reasons that gas prices are rising, and people should take time to educate themselves on this very important issue that affects all of our lives. As I have said again and again, look to the product inventories – which are published on a weekly basis by the Energy Information Administration (EIA) – to guide you on what prices will do in the short term. USA Today (2) writes:

Nationwide, the reasons behind the increase in gasoline prices are ripped from an Econ 101 textbook:

*Supply. Gasoline inventories fell for the fourth-consecutive week last week and were 4% lower than a year ago, partly because of lower imports and refinery maintenance, according to the Energy Department. The amount of gasoline was enough to meet demand for 23.7 days, the lowest since the week ended Jan. 12.

*Demand. Drivers have been pumping more gasoline, despite the higher prices. Average gasoline demand in the four weeks through March 2 was 1.2% higher than the same period a year ago, according to the Energy Department.

There are multiple factors right now affecting supply. Refinery turnaround season – when refineries shut down or scale back to do maintenance – peaks in the early spring and early fall. This is because those time periods provide a combination of moderate weather and off-peak gasoline demand. In the spring, however, there is also the transition to summer-gasoline. I have previously explained what this transition is all about. The result is that it lowers the available supply of gasoline just as driving season is picking up. Lower supply + higher demand = higher prices. This is why gas prices tend to spike at this time every year, although this year’s spike is early than normal.

Gasoline demand was unusually high throughout the winter. This could pose problems in the coming weeks, as it has resulted in gasoline inventories being pulled down. The U.S. relies on gasoline imports to satisfy part of the demand, but when the price falls it becomes less profitable for those exporting the gasoline. When the price comes back up, imports increase and the exporter can make higher profits.

Because the price was lower over the winter – and because demand is typically lower than what was seen this year – imports were low in the winter. Because prices have come up, expect to see gasoline imports rise and take some of the pressure off of the supply constraints. On the other hand, demand will pick up over the next few months, so it is going to be a tight race to see if imports can keep up.

My personal belief is that even though there may be lulls in price, higher gasoline prices will be the norm rather than the exception in upcoming years. Refinery capacity is just too tight, and some argue that Saudi Arabian oil production has peaked (although I disagree). If (when) the latter is true, this would (will) put incredible pressure on prices because growing demand is going to run head on into falling supply. That is what Peak Oil, or oil depletion discussions, are all about.

My advice to all would be to plan for a future in which energy prices are much higher, and start making efficiency improvements in the car you drive, the electricity you use, and the fuel you use to heat your home. I believe this will pay big dividends for you going forward, and your budget won’t be quite so exposed to volatile energy prices. As a bonus, making these changes will lower your greenhouse gas emissions.

References

1. Californians Pay $3 Again for Gas, The Charleston Gazette, March 8, 2007

2. Gasoline Prices Getting Pumped Up Again, USA TODAY, March 9, 2007

March 9, 2007 Posted by | gas inventories, gas prices, gasoline | 18 Comments

Why Are Gas Prices Rising?

Gas prices are once again headed higher, and most people are probably wondering why. The Charleston Gazette (1) provides a typical reaction:

Lee Franc, a client manager from St. Petersburg, spent about $40 to put 16 gallons in her Toyota Highlander. She works at home and can go a week or two without filling up.

“Katrina, I can understand,” Franc said. “I didn’t see a very good explanation this time. You hear so many excuses it gets to where you don’t believe anything anymore.”

The thing is, they are not excuses. There are valid reasons that gas prices are rising, and people should take time to educate themselves on this very important issue that affects all of our lives. As I have said again and again, look to the product inventories – which are published on a weekly basis by the Energy Information Administration (EIA) – to guide you on what prices will do in the short term. USA Today (2) writes:

Nationwide, the reasons behind the increase in gasoline prices are ripped from an Econ 101 textbook:

*Supply. Gasoline inventories fell for the fourth-consecutive week last week and were 4% lower than a year ago, partly because of lower imports and refinery maintenance, according to the Energy Department. The amount of gasoline was enough to meet demand for 23.7 days, the lowest since the week ended Jan. 12.

*Demand. Drivers have been pumping more gasoline, despite the higher prices. Average gasoline demand in the four weeks through March 2 was 1.2% higher than the same period a year ago, according to the Energy Department.

There are multiple factors right now affecting supply. Refinery turnaround season – when refineries shut down or scale back to do maintenance – peaks in the early spring and early fall. This is because those time periods provide a combination of moderate weather and off-peak gasoline demand. In the spring, however, there is also the transition to summer-gasoline. I have previously explained what this transition is all about. The result is that it lowers the available supply of gasoline just as driving season is picking up. Lower supply + higher demand = higher prices. This is why gas prices tend to spike at this time every year, although this year’s spike is early than normal.

Gasoline demand was unusually high throughout the winter. This could pose problems in the coming weeks, as it has resulted in gasoline inventories being pulled down. The U.S. relies on gasoline imports to satisfy part of the demand, but when the price falls it becomes less profitable for those exporting the gasoline. When the price comes back up, imports increase and the exporter can make higher profits.

Because the price was lower over the winter – and because demand is typically lower than what was seen this year – imports were low in the winter. Because prices have come up, expect to see gasoline imports rise and take some of the pressure off of the supply constraints. On the other hand, demand will pick up over the next few months, so it is going to be a tight race to see if imports can keep up.

My personal belief is that even though there may be lulls in price, higher gasoline prices will be the norm rather than the exception in upcoming years. Refinery capacity is just too tight, and some argue that Saudi Arabian oil production has peaked (although I disagree). If (when) the latter is true, this would (will) put incredible pressure on prices because growing demand is going to run head on into falling supply. That is what Peak Oil, or oil depletion discussions, are all about.

My advice to all would be to plan for a future in which energy prices are much higher, and start making efficiency improvements in the car you drive, the electricity you use, and the fuel you use to heat your home. I believe this will pay big dividends for you going forward, and your budget won’t be quite so exposed to volatile energy prices. As a bonus, making these changes will lower your greenhouse gas emissions.

References

1. Californians Pay $3 Again for Gas, The Charleston Gazette, March 8, 2007

2. Gasoline Prices Getting Pumped Up Again, USA TODAY, March 9, 2007

March 9, 2007 Posted by | gas inventories, gas prices, gasoline | 26 Comments