Presentation on theme: "GAS PRICES, BROCCOLI AND DOUGHNUTS ECNS 594 Montana Council on Economic Education June 20, 2013."— Presentation transcript:
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?
elasticitysocial costs real versus nominal Supply and demand Efficiency and equity Lots of teachable economic topics…
The downside of rising oil prices The upside of rising oil prices The oil price see-saw
Oil prices? What, me worry? Consumers Taxpayers Producers Society
Energy is Everywhere
Montana’s Energy Industries
Drilling Oil and Gas Wells NAICS Employment = 333 Number of firms = 49
Support Activities for Oil and Gas NAICS Employment = 1,256 Number of firms = 159
Petroleum Refining NAICS Employment = 1,069 Number of firms = 5
Coal Mining NAICS Employment = 946 Number of firms = 7
Colstrip Steam Electrical Station 2009 Employment = 578 Number of firms = 1
Energy security = interdependence, not independence
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-2010Oct-2010Nov-2010Dec-2010Jan-2011Feb-2011 Composite Domestic Imported
Movement of oil by pipeline between PADD Districts PADD DistrictAnnual-Thousand barrels 2010 From PADD 1 to PADD 40 From PADD 2 to PADD 444,604 From PADD 3 to PADD 49,906 From PADD 5 to PADD 40 Total Oil From Other PADD Regions54,510 From PADD 4 to PADD 2122,722 From PADD 4 to PADD 370,895 From PADD 4 to PADD 511,548 Total Oil To Other PADD Regions205,165 PADD 4 Exports+150,655
Wholesale traded in open market
Imports make up the difference
But how about wind, Montana has lots of it?
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
D2D2 D0D0 D1D1 Quantity/Time Price/Unit Small Car Market
D0D0 D1D1 D2D2 Quantity/Time Price/Unit Large Car Market
Do high gas prices sell small cars? Sales = β o + β 1 (Fuel Price) + ε ModelCoefficient on β 1 Adjusted R-Squared Chevy Aveo *** Honda Civic *** Toyota Yaris *** Toyota Prius Hybrid *** Cadillac CTS ** Ford Expedition Toyota Sequoia Chevy Colorado Toyota Tundra ***
Why hybrids are difficult to sell Discount Factor (3%) Year Gas Price ($3.00 *1.05) Gas Cost PV of Gas Cost Reg Car Total PV of Gas, Reg Car Fuel Cost, Hybrid PV of Fuel Cost, Hybrid Total PV of Fuel, Hybrid Value of Time Savings Total PV of Time Savings Annual Mileage 12,000 MPG Chevy Volt=100 MPG Chevy Cruze=30 Value of Time$50 per hourGas StationTime Savings=300 minutesPer year Total PV of Gas Savings Total PV of Time Savings Total Savings
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
Social costs per mile traveled
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
Passenger vehicles also account for over 75% of fuel consumed…
Fuel tax Vehicle miles traveled tax Income tax 3 approaches to change behavior
Equity User pays Burden on poor and rural Increases costs of goods Efficiency Low administration costs Incentive to curtail use Fuel Tax
Equity User pays Burden on poor and rural Efficiency Incentive to reduce use Administrative costs Vehicle Miles Traveled (VMT) tax
Equity All pay, not just highway users Avoids burden on poor and rural Efficiency No incentive to reduce driving Administration costs negligible Income tax
$1 Trillion in profits and still at the trough?
$952 billion“Don’t need 100 year old subsidies to sell $100 per barrel oil” $36.5 billion in subsidies Subsidies and the price of gas
Unrest in Middle East Weak Dollar Global Growth Japanese Energy Supply Oil companies inherit oil prices more than drive them
Even monetary policy
Resources for teachers Historical look at oil company subsidies – Short term energy outlook: – Annual energy outlook: – International energy outlook: – Monthly energy review: –