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GAS PRICES, BROCCOLI AND DOUGHNUTS ECNS 594 Montana Council on Economic Education June 20, 2013.

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Presentation on theme: "GAS PRICES, BROCCOLI AND DOUGHNUTS ECNS 594 Montana Council on Economic Education June 20, 2013."— Presentation transcript:

1 GAS PRICES, BROCCOLI AND DOUGHNUTS ECNS 594 Montana Council on Economic Education June 20, 2013

2 Our lesson today…. Energy industry in Montana Energy security = energy independence? Gas prices Broccoli and doughnuts

3 Why only 2 percent?

4 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?

5 Wheels & Women…a teachable moment? How are oil prices determined? Drill baby drill? Price asymmetry? SUV sales?

6 elasticitysocial costs real versus nominal Supply and demand Efficiency and equity Lots of teachable economic topics…

7 The downside of rising oil prices The upside of rising oil prices The oil price see-saw

8 Oil prices? What, me worry? Consumers Taxpayers Producers Society

9 Energy is Everywhere

10 Montana’s Energy Industries

11 Drilling Oil and Gas Wells NAICS 21311 2009 Employment = 333 Number of firms = 49

12 Support Activities for Oil and Gas NAICS 213112 2009 Employment = 1,256 Number of firms = 159

13 Petroleum Refining NAICS 32411 2009 Employment = 1,069 Number of firms = 5

14 Coal Mining NAICS 2121 2009 Employment = 946 Number of firms = 7

15 Colstrip Steam Electrical Station 2009 Employment = 578 Number of firms = 1

16 Energy security = interdependence, not independence

17 “proven” reserves

18 Add recoverable and unconventional…

19 The Canadian tar sands

20 The marginal barrel of oil sold Does not matter where or by whom There is no use thinking nationalistically

21 OPEC as a united marginal producer

22 The world price is the price that matters Drill baby drill Foreign oil World market

23 What’s the backbone of what we pay at the pump?

24 up from the ground come a bubblin’ crude…

25 Refiner Acquisition Cost of Crude Oil PADD Region 4 (dollars per barrel) Acquisition Type Sep-2010Oct-2010Nov-2010Dec-2010Jan-2011Feb-2011 Composite 67.5069.8976.0580.6482.5077.97 Domestic 69.7774.8478.0682.7484.7181.62 Imported 64.7963.1073.5977.8878.9373.15

26 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

27 Wholesale traded in open market

28 Imports make up the difference

29 But how about wind, Montana has lots of it?

30 NERC Regions

31 Low expectations for wind energy

32 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)

33 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”

34 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)

35 How elastic is supply and demand?

36 Gas price asymmetry float like a butterfly sting like a bee

37 Are oil markets efficient? Oligopoly Power OPEC External Costs Nationalized Oil

38 Now for the broccoli and doughnuts…

39 U.S. encourages consumption!

40 So how do we get more Americans to eat broccoli?

41 Is $4.00 per gallon the tipping point?

42 Consumer behavior Nominal v. real prices Gas complementary good to autos Price elasticity of demand

43 Early attempt to encourage broccoli consumption

44 D2D2 D0D0 D1D1 Quantity/Time Price/Unit Small Car Market

45 D0D0 D1D1 D2D2 Quantity/Time Price/Unit Large Car Market

46 Do high gas prices sell small cars? Sales = β o + β 1 (Fuel Price) + ε ModelCoefficient on β 1 Adjusted R-Squared Chevy Aveo+17.9020.321*** Honda Civic+105.6600.425*** Toyota Yaris+25.8080.448*** Toyota Prius Hybrid+51.2170.392*** Cadillac CTS+10.2980.200** Ford Expedition-7.6630.44 Toyota Sequoia+4.7720.102 Chevy Colorado-7.0250.050 Toyota Tundra+48.1430.257***

47 Why hybrids are difficult to sell Discount Factor (3%)11.031.06091.0927271.125508811.159274071.19405231.22987387 Year12345678 Gas Price ($3.00 *1.05)33.153.30753.4728753.646518753.828844694.020286924.22130127 Gas Cost1200126013231389.151458.60751531.537881608.114771688.52051 PV of Gas Cost Reg Car12001223.300971247.054391271.269041295.953871321.118021346.77081372.92169 Total PV of Gas, Reg Car10278.3888 Fuel Cost, Hybrid360378396.9416.745437.58225459.461363482.434431506.556152 PV of Fuel Cost, Hybrid360366.990291374.116316381.380711388.786162396.335407404.031241411.876507 Total PV of Fuel, Hybrid3083.51664 Value of Time Savings250242.718447235.648977228.785415222.121762215.652196209.371064203.272878 Total PV of Time Savings1807.57074 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 Savings7194.87215 Total PV of Time Savings1807.57074 Total Savings9002.44289

48 Only two ways to fund highways taxpayers highway users

49 2 criteria for judging policy efficiency Users pay marginal social costs of highway use equity Poor versus rich, rural versus urban

50 Subsidize marginal social benefits education worker retraining programs Tax marginal social costs pollution Liquor and tobacco

51 Social costs per gallon resulting from fuel consumption

52 Social costs per mile traveled

53 Designing Policy: doughnuts to broccoli External costs are related to fuel use AND miles driven How can we change behavior, without sacrificing equity?

54 Passenger vehicles account for over 90% of total miles driven

55 Passenger vehicles also account for over 75% of fuel consumed…

56 Fuel tax Vehicle miles traveled tax Income tax 3 approaches to change behavior

57 Equity User pays Burden on poor and rural Increases costs of goods Efficiency Low administration costs Incentive to curtail use Fuel Tax

58 Equity User pays Burden on poor and rural Efficiency Incentive to reduce use Administrative costs Vehicle Miles Traveled (VMT) tax

59 Equity All pay, not just highway users Avoids burden on poor and rural Efficiency No incentive to reduce driving Administration costs negligible Income tax

60 $1 Trillion in profits and still at the trough?

61 $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

62 Unrest in Middle East Weak Dollar Global Growth Japanese Energy Supply Oil companies inherit oil prices more than drive them

63 Even monetary policy

64 Resources for teachers Historical look at oil company subsidies – Short term energy outlook: – Annual energy outlook: – International energy outlook: – Monthly energy review: –

65 Questions?

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