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July 28, 2004

Oil Up, Gas Down?

Crude oil prices are flirting right now with $43 a barrel -- an all-time high. This may come as a bit of a surprise, since Northwest gas prices have fallen substantially over the past 2 months: in late May, gas in Washington and Oregon averaged about $2.30 per gallon, but it's below $1.96 today.

The rise in Northwest gasoline prices through late May corresponded with a runup in global crude oil prices. But oil prices fell by 15 percent from late May through mid-June, as OPEC signaled it would increase its output. At the same time West Coast refiners built up their stocks of gasoline, leading to a fall in gas prices even in the middle of summer driving season.

Then the bad news started again--most recently, the news that the Russian government may shut down production from oil giant Yukos.

So with oil prices on the rise once more, we're likely to see yet another increase in prices at the pump over the next few months. And that could provide yet another piece of evidence that a transportation system dominated by the automobile shackles our economy to distant oil wells (the Northwest produces a tiny amount of petroleum in comparison with its consumption) and to global economic forces far beyond our control. Political shenanigans in Russia (or Nigeria, or Venezuela, or anywhere in the oil producing world) now work to siphon money out of our economy. All the more reason to take steps now to wean ourselves from the sticky stuff.

Posted by ClarkWD | Permalink


So, oil prices, and gas prices, are volatile and most likely going up. Liquid fuel production is peaking in the next decade or so. But, is this at all predictable? Current real fuel costs are still below 1970's prices which fuels skepticism about the impact of price increases on travel behavior (pun intended). One of the most sophisticated travel models (EMME2 with considerable pumping up by Los Alamos Laboratory) used by Metro, the regional planning agency of Portland, assumes NO REAL INCREASE IN GASOLINE PRICES for the forseeable future, leading to predictions of continuing strong rise in vehicle miles traveled and "need" for more highways to meet this demand.

Arguably, if there was a defensible price curve based on rising world demand and declining production that could be inserted in the model, we could save ourselves billions of dollars and considerable disruption of communities and travelers by NOT building more road capacity.

Challenge: is there a defensible price curve out there that would pass muster for use in travel forecasting?

Help! Before we pave again!

Posted by: Rex Burkholder | Jul 28, 2004 9:59:13 PM

The short answer is that I don't know of a single, universally agreed upon price curve for petroleum products. And one of the reasons is that there's still a lot of uncertainty about when petroleum production will peak, and what it will mean to prices when it does.

Judging from your comments, I'm sure you know that there's a lot of controversy among experts about when the peak will occur. Some geologists and analysts are arguing that the peak year of global oil production will be as soon as 2008. Others say that there's easily enough petroleum or petroleum substitutes to maintain supply growth for the next 30 years. I have my own opinions about which camp is right, but they're just opinions--and they're colored by my hopes and fears, rather than any deep understanding of the facts.

That said, a model that assumes no increase in real gasoline prices is in some ways an *improvement* over some older economic models, which often assumed that the price of commodities such as gasoline tend to decrease over time, not just stay constant. That was roughly the pattern (with some bumps) from 1919 through 1999. (See this post for a nifty graph: http://cascadiascorecard.typepad.com/blog/2004/06/fuels_progress.html .)

But better still would be a model that had a range of price assumptions -- and/or one that built in the uncertainty over gas prices as an economic cost. After all, Wall Street arbitragers make money based on the idea that investors require a price premium to take on added risk and uncertainty --so why should transportation modeling be any different?

But it's an excellent question, Rex, and a steep challenge. I'll keep my eyes open for better examples of price curves -- and if I find them, I'll post them here.

Posted by: Clark Williams-Derry | Jul 29, 2004 2:29:36 PM

Sounds like a mission for 'Redefining Progress.' (www.redefiningprogress.org). Have you seen their Genuine Progress Indicator? A clear indication that modern economic thought is out of touch with the growing desire for a sustainable future. What you need Rex are economic advisors that can see past the end of their pointy noses.

Posted by: RSS | Jul 30, 2004 9:59:54 PM