## Friday, June 06, 2008

### Simple numbers

So, if crude oil futures cost at least $126/42 gallon barrel these days, doesn't that imply that the raw starting material for gasoline already costs (once you factor in the time delay between futures contracts and refining)$3/gallon? This suggests to me that the "correct" price for gasoline in the US should be closer to $5-6/gallon, when the refining catches up with futures. (That doesn't even touch on issues about how much of the crude oil pricing is due to speculation vs. actual supply & demand, or how much of this is due to the effective weak dollar policies of the US central bank.) #### 13 comments: Anonymous said... The US has lived a dream of cheap gas for a very long time. No wonder why SUVs and bigger vehicles are (maybe, were) popular. In most countries gas is no way near the US price. We'll have to see how they deal with it, but I think we'll have the$5 gallon soon.

Anonymous said...

this assumes the yield from crude is <100%. Seems reasonable, but for example most pumps mention 10% ethanol. But I'll ask my friend.

Andrew said...
This comment has been removed by the author.
Andrew said...

Yield of gasoline is only around 50%, though the total yield of marketable products from a barrel of oil is more like 120%-- about 50 gallons of product from 42 gallons of oil. Gasoline is not the most expensive of these, but still, as Doug points out, close to $3 per gallon goes to crude oil costs, and gas should continue to rise, especially with the weak dollar. Here's what a barrel of oil gets you. sylow said... Doug, you are right. When crude hits 150$, gas should be 5$in USA nationwide(coastal areas will be higher than that). Jim Cramer said that on CNBC yesterday too. Gas price is lagging crude futures at the moment. descendent said... Here's what I don't get: The US was in (arguably) a similar Energy problem in the late 70's. But once the crisis subsided, the interest in developing renewable energy kinda fizzled. Fast forward 30 years, and where is all the alternative energy technology the world has been developing since the 1st energy crisis? 30 years to work on this problem and what do we have to show for it besides nuclear power plants (which the US still hasn't fully embraced) and better fuel economy (which in some ways exacerbated the problem)? --end futile rant-- CarlBrannen said... There's been steady improvements in biofuels of the evolutionary sort. They're getting bad press from big oil and OPEC press flack right now, but that should die down as the bad harvests reverse and food comes down in price. Anonymous said... There are predictions of$12 per gallon gasoline in the next twenty years, as demand continues to outstrip supply. This figure apparently includes biofuels as a factor.

Doug Natelson said...

carlbrannen - not to sound too pessimistic here, but what makes you think food prices will come down, particularly when fuel prices are so strongly coupled to production and distribution?

CarlBrannen said...

Doug, here's the latest estimates from the USDA: www.fas.usda.gov/psdonline/circulars/production.pdf

Some places are down (especially with rice), others are up, but overall, this will be a year of new world record grain harvests. For example, Ukraine wheat production is up 50% from last year. China soybean up 19% and their corn and wheat to make new records. High grain prices make high grain production.

Total world grain production (from the above link):
2006/2007) 2004.6
2007/2008) 2114.1 preliminary
2008/2009) 2161.9 projected

In case you don't believe US Dept. of Agriculture figures, the UN is saying the same thing; record harvests for 2008. Do a google search. Learn more. Ignore the news articles; the news media is for entertainment, not information. Scary stories make good entertainment. Any day now we're going to starve because of the lack of bees, LOL.

Along this line, I'm arguing with a particle physicist about the economics and physics of ethanol. I'm stunned at the difficulty in explaining even the simplest facts about the industry. See for yourself:
www.backreaction.blogspot.com/2008/06/biofuel.html

I'm the VP of engineering at a company that owns an ethanol plant. It's my business to know as much as possible about these things. I'm paid to learn about it just like a physicist is paid to learn about physics. If you have any questions about the subject I'll be glad to answer them. To make sure I hear your questions, post them on my blog devoted to the subject:

www.ethanolfuel.wordpress.com

I am reminded about something Feynman said just before receiving the Nobel prize, on the subject of outsiders discussing a topic they know nothing about:

"It's because somebody knows something about it that we can't talk about physics. It's the things that nobody knows anything about that we can discuss."

Doug Natelson said...

Carl - Thanks for the links. Interesting reading material. I have two points.

1) Just because we have record harvests world-wide doesn't mean that my prices at the store will fall. US milk production is up this year over last year by around 2% (see here), but the price in my supermarket is still up quite a bit over a year ago. Yes, higher prices imply producers will try to boost supply to get more profits; still, given the costs of production, increased demand, and the weakening dollar, I don't think it's obvious what the net result will be.

Even if feed prices come down and milk production goes up, shipping milk to me in Texas from Wisconsin will be quite a bit more expensive if diesel fuel (whatever the source) costs $7/gal. 2) No need to get defensive, dude. I'm not knocking biofuels, I'm not blaming you or the ethanol industry for higher food prices, and there's no need to go out of your way to call me arrogant and ignorant. Doug Natelson said... FWIW, I should have said (in my earlier comment) "...when fuel prices are so strongly coupled to food production and distribution?". CarlBrannen said... Doug, if there's enough bad weather around enough of the world we could get a bad harvest and people will starve. On the other hand, high food prices for US consumers are mostly about high transportation costs due to oil price rises. The dollar amount of corn or wheat in your diet is negligible. In fact, total world agriculture per person is only around$220 per person per year, or less than a dollar per day. These are the basic prices of food (including meat); they do not include the surcharges for things like paying a waiter to serve it to you or a store to have it convenient, or a factory to package it with some nasty chemicals to make it taste better, etc.

Along that line of thought, despite the world-wide shortage of rice, the local Safeway just put one of my staples, Rice-A-Roni, on sale at a buck a box. A box has about 7 ounces of rice, if I recall.

I don't follow rice prices, what are they, as much as $15 per bushel? A bushel of rice should be something like 60 pounds so that's$0.25 per pound; my box of RaR has about 12 cents worth of rice (and that's with record high rice prices).

The weakening dollar will raise all prices, food and everything else. So as that happens it won't be so noticeable as food price rising per se. In fact, the price of scrap metal has gotten so high that companies like mine are very concerned; druggies are stealing and destroying expensive equipment for its scrap value.

And I should add that the bad weather in the US is worrying me.